I’ve been terrible with personal finance my whole life. It’s just something I never bothered with, always dismissing that things will take care of themselves. I never got into debt I can’t handle but my savings was pitiful, I ended up spending a lot on impulse, and I never can remember where my money flew away to.

I’ve finally gotten out of the budget-phobia for a short while now and my finances have started to look better. This a short guide for those in the same boat as I was, “knowing” they need to get this area handled or risk spending the rest of their financial life like a twelve-year old in a comic-book store with a hundred dollars in their pocket.

Note that this is how I worked my budget and I’m not an expert, so use it as a guide to help you. Along the way, you’ll figure out ways to work that are more appropriate for your situation so be flexible enough to accomodate your own instincts.

1. First thing to do is to track your actual spending.

This is one of the hardest part. As someone who never paid much attention to budgeting, conciously watching where you piss money away is very painful. I cringed in horror every night the first week I did this.

To accomplish this, the simplest way is to just open a spreadsheet. Put days of the week on the leftmost column and areas of expenses on the top. I suggest doing it this way, instead of investing on a budget software immediately. This is very simple and the only goal is to track your spending.

Every night before bed, fill it up. Monday - 10 dollars on eating out, 120 dollars on groceries, 5 dollars on candies, etc. Tuesday, do the same thing. Do a running total for each day on the rightmost column. Once you see the totals adding up, that’s when you usually cringe, “I spend this much in one day?!?!?!”

Do this for about two to four weeks. Fight through the urge to give up. This is a very anxiety-inducing procedure. Just remind yourself that the goal is only to see where the money is going. Try not to judge yourself.

2. Study the spreadsheet.

Take down the patterns. Look for the following:

• Which big expenses are fixed and will occur on a regular basis (utilities, mortgage, tuitions, kids’ allowance, gym memberships, savings, etc.)?
• How much do you average spending on a normal day?
• What area do you spend the most money in?
• What expenses would you consider wasteful?
• What expenses do you consider a smart use of your money?
• How much money goes into entertainment activities (movies, sports, cable, DSL, etc.)?
• How much did you spend in total?

3. Take the total amount you spent and compare it with your income during the same period.

Were your expenses greater than your income?

If it is, you’ll need to cut out some things in the last period’s expenses from your projected expenses in the next budget period. If it’s not, you may decide to do away with some other expenses as well. Possible things you can consciously cut out or at least spend less on are:

• Entertainment activities
• Dining out
• Club Memberships
• Gas/Transportation (take cheaper public transportation or carpool)
• Vices (cigarettes, alcohol, soda)
• Other wasteful expenses

Whichever you decide to be dispensable, work it out. It’s impossible to sustain a budget when your expenses are greater than your income.

4. Start your new budget

Now you have your total expenses less the things you can afford not to spend on for the coming period. Let’s call it the Total Budget Amount.

Start a new spreadsheet with the same layout as before. This time, add one column for the Daily Budget Amount.

You can start your new budget by removing the fixed expenses from that amount. Make sure to write it down somewhere in your new spreadsheet to have one sheet where you can see all the activity.

The Total Budget Amount will be the base for your daily spending. Divide this with the number of days during the coming period. Then, compare this amount with the average daily expense during the last period. Is it smaller than the last period? Is it smaller than the average? If it is, use that to populate the Daily Budget Amount column. Otherwise, use the daily average from last period’s expenses.

Break down the Daily Budget Amount into the different daily expense columns. They WILL NOT be the same for each day so allot wisely. Use the previous period’s expense spreadsheet for reference. For example, you get a full tank every Monday and Thursday so allot the money for gas on those days or you take the kids to the movies every Sunday so allot the expense for that on Sundays. Fill in the daily expense columns first and don’t worry about balancing it with the Daily Budget Amount in the meantime.

After filling the columns, compare the total on the rightmost column with the Daily Budget Amount. Mark off all rows where the Total Daily Expenses is greater than the Daily Budget Amount (UNDERBUDGET). Similarly, mark off all rows where the opposite is true with a different color (OVERBUDGET).

Balance each OVERBUDGET row by subtracting the difference from the Daily Budget Amount. Once you have all the extra money subtracted, start adding them to the UNDERBUDGET items.

At this point, two things can happen. Either your alloted money will be short for all the expenses you have planned for or you will have some extra unallocated amount.

If you’re over, go through the daily expenses to see where you can chop off the needed amount to strike a balance. Check for the weekend and entertainment expenses first. You’ll usually find the easily disposable expenses there.

If you’re under, either spread it across the period, add it to your projected savings or use it to plan an extra recreational activity over one or several days.

5. Apply the budget.

Now, you have an actual budget. It’s not the best budget you have at your disposal, but consider this a trial period while you’re learning to get a handle on your expenses.

Try to be conscious of your budget throughout the day. It will help to look at your daily targets every morning or even write them down to carry with you.

Every night, replace the allocated expenses for the day with your actual expenses. This is another painful process that will bring you some anxiety, especially in the first few months.

6. Be flexible.

Things can happen that will mess up your daily allocations. Learn to allow that and move on. Treat it as a daily exercise. Every problem allows you to adjust and learn jut a little bit more about your finances. It will help to adjust the allocations on a daily basis, based on how you do the day before, just to see how well you can stretch money.

Personally, it took me around 4 months before getting comfortable with the new habit and it continues to be a learning process.

7. Recommended tools.

I recommed you stick to your simple homegrown spreadsheet the first few months. Using a predesigned spreadsheets or applications will just confuse you with stuff that is not relevant to you when you when you’re starting out.

Right now, my tool of choice is Pearbudget, a free Excel-based spreadsheet. I changed a few things to accomodate my own needs but it is fully-functional and does everything I need.

There are tons of personal finance blogs as well that can help you on your journey. One of the most useful for beginners is Get Rich Slowly, whose author is also on the learning path to getting his finances in check.

I use the Simple Tags plugin on this site which allow me to easily make links to Technorati tags.  I initially did this as a favor to readers who want a quick way to get to related posts on Technorati.  I’ve now changed my mind and replaced the tags as internal search links to relevant entries on my blog instead.

I did this to point readers to similarly relavant posts in my blog which they will otherwise miss on an outlink to Technorati.

Hope this is more useful than a burden to anyone who reads the blog.

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If you’re convinced that you need to continue your education and keep learning new things to add to and complement your present skillsets, the next step is to determine in which areas you want to further your education. Since you can only focus on a limited number of things at any time period, it’s important that you choose wisely. Generally, I would look for things that:

• Will solve an existing problem
• Bridges an existing gap in one of my present skills
• Can improve my existing income streams
• Can save me either money or time in the long-term
• Will improve one of these areas of my life: finances, health, and relationships.

Once I identify those things that meet the above criteria, I use my next and most important filter:

• Will I enjoy doing this?

The way I see it, I’m an adult now and the days of studying things for the sake of studying them like we did in school is over and done with. Anything that doesn’t add value to my present moment experience is a huge step back in the wrong direction. More importantly, learning just comes many times easier when you can actually enjoy the process.

After this is taken care of, I can start prioritizing which ones to focus on first. This is determined by the following criteria, in order of importance:

• Long-term impact. How valuable is this in the long term? How much money will this potentially make me? How much time do I stand to gain from this? How much improvement will I expect this to create in my relationships? How much more comfort and peace of mind will this bring?
• Time required. How long will it take me to learn?
• Urgency. Is this something I am in dire need of at the moment? Or is this something I can afford to not to learn for now?
• Short-term gain. What do I stand to gain from this as soon as I learn it? What results await me a month after I learn and implement this?

I always make sure to focus on items that will make the biggest long-term impact because these are the ones that will serve me years beyond its immediate value. For example, those writing courses back in high school continue to serve me to this day in my technical consulting duties. I write the clearest damn technical explanations for programming solutions my clients can ever wish for.

Time required is also a big concern. If something will take me five years to learn then chances are big that I will pass it up for other, shorter studies. While urgency plays a factor, I’ve never really encountered it so much. Anything that appears you will need to learn right now, you can always hire someone else to take care of while you focus your attention on things with greater future relevance. I put short-term gain at last because learning something for a quick fix right now without any foreseeable future gain is plain short-sighted and not the best use of time and resources.

Generally, I like to learn things focused on three areas:

• Software Skills
• Social Skills
• Online income

I’ve found these three things to be the most beneficial and enjoyable for myself. In doing so, I’ve had to marginalize learning on other areas I like and have dabbled in as well (like martial arts and competitive shooting) largely because the former provide the biggest long term benefit for me. Likewise, I have totally ignored other things I have fancied learning in the past like flying planes or playing a stand-up bass.

I have many more years of learning and in time, I may get to attend to them all, but for now, my focus is laying the pipeline for the rest of my life and efficiently managing continued education will help me in that process just as it can help you in your own future goals.

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