Budgeting 101

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First, a confession: When I was in college, and for my first few years out of college and in the working world, I was pretty much the worst budgeter ever. Well, maybe not ever. But I was probably tied with lots of other folks, and most of us were making the same mistakes: blowing money as soon as we got it and failing to pay bills on time.

Those two mistakes are related, of course -- if you blow your money and don't have enough to pay your bills, they obviously don't get paid on time. Eventually, I got into a cycle of paying bills late as a matter of routine, using credit cards for overflow expenses, running up an ever-larger balance, and ... well, eventually, it became too much to manage.

The final straw for me came when I was a few years out of college, and my employer switched to a monthly payroll system. It's hard to live paycheck-to-paycheck when the check only comes once a month, and it's even harder when that check comes on the 10th, as mine did, and rent is due on the 1st. Unless I wanted to be living in the streets, I had to learn how to have enough money left on the 1st to pay the rent -- with enough left over to be able to eat until the next check on the 10th.

So after a lot of trial and error, I came up with a plan. Here's what I learned:

• My first budget was stupid. My first few were, actually. Feeling stressed and overwhelmed, I quickly laid out an admirable but completely unrealistic "austerity plan" for getting my finances back on track as quickly as possible. This budget was a masterpiece, with carefully considered categories such as "social life," against which were put absurdly low monthly amounts like "$25." Later, I found out that lots of people start like that, with a budget that shows how they'd like to spend their money -- often in some super-responsible pipe-dream alternative universe -- rather than a plan that works with how they actually do spend.
  
• My budgets got smarter when I worked backwards from my actual spending. Want an eye-opening experience? Track every dollar you spend for a month. The easiest way to do this is to get receipts for everything and save them, and to tally them up weekly so that you can capture details before you forget them. You can do the tallying with Quicken, an Excel spreadsheet, or even a pad of paper -- it doesn't matter. The point is to take a close -- and possibly harsh -- look at your spending.

Once I gathered the data on my actual spending, there were three things I wanted to understand right away:

• Where was the money really going? I never seemed to have enough, even though I seemed to making a reasonable amount. Was I just being sloppy, or was I trying to live beyond my means?

• Did my spending exceed my income, and if so, by how much? I knew it did, but I needed to see it in black and white and discover why.
  
• Where was the waste? How much were late fees and credit card interest costing me? How much of my spending was just needless? Were there ways I could accomplish the same goals while spending less?

Needless to say, the answers to these questions weren't pretty. I was being sloppy, I was living somewhat beyond my means, my spending did exceed my income, and irresponsibility with bills was costing me a lot -- both in terms of money and in terms of stress. After some trial and error, I was able to get my house in order and came up with a budget that reflected hard-won lessons learned and the reality of my financial situation.

I won't bore you with the details of my budget, because they wouldn't be of much use to you. You'll have to come to grips with your situation on your own. But here are some of the big lessons I got out of the experience:

• Money spent with a credit card is still money spent. One way or another, you are going to have to pay for that purchase with actual income eventually. I learned the trick of asking myself "Would I buy this with cash?" before using a credit card. If the answer was "no," then I didn't (and still don't) make the purchase.
  
• Separate needs from wants. During the time my woes were going on, I spent many nights and weekends playing guitar in a rock band. I had been telling myself I "needed" various bits of expensive musical equipment and had been spending accordingly. But I didn't "need" the guitar stuff the way I needed to pay my rent or the electric bill. Simple as that sounds, it took me a long time to really internalize that point.
  
• Open bills right away. Don't throw 'em in a pile and ignore them until the lights get shut off. Look at them when they arrive, figure out how and when you'll pay them, and get any unexpected charges into your financial plan for the month. It may not be your idea of fun, but you'll save a ton in late fees and save yourself a boatload of stress, too.
  
• Save. Even if you're in college, having a few hundred bucks stashed away for unexpected expenses can make a big difference in your financial security and sanity. If you're getting steady checks from a part-time job or from home, try to put aside a little bit out of each one. And when you're out, saving becomes even more important. Once your finances are stabilized, start building up a rainy-day fund. And, of course, get enrolled in your employer's workplace savings plan and start saving for retirement. The sooner you start building wealth, the wealthier you'll be in the end.

For more great info on getting your budget in order, check out the Fool's Budgeting discussion board as well as these features:

• Setting Up a Budget
• Budget Denial
• Balancing Your Budget

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Fool contributor John Rosevear welcomes your questions and comments. The Motley Fool has a disclosure policy.