It was nearing the end of October several years ago and I had just proposed to my then fiance. We were going to be married in February of the following year. I was excited to begin our life together - more excited than I had ever been about anything - but I was also nervous. No, I wasn’t nervous she’d run away at the altar, or pretend she was abducted to avoid the marriage. I was worried that we wouldn’t have enough money. At the time, both of us were full-time undergraduate students. I was teaching German part-time for $9 per hour. She was working at the University library for $8 per hour. We were lucky if we both were able to work 20 hours per week.

One common myth about money is that if you just increase your income, you’ll be alright. You’ll be able to pay down your credit card debt, start investing for retirement, and maybe even put away some money for a rainy day. Nine times out of ten, if a person would first focus on eliminating wasteful and/or unnecessary spending, their finances would improve by leaps and bounds. They just need a solid budgeting process. I knew we didn’t have much chance to increase our income and still do well in school, so I thought we’d focus on keeping our expenses down.

One Saturday morning I began the process of creating a simple budget in Microsoft’s Excel. At first I thought we’d just track our expenditures. That was straight-forward enough. I made one sheet for the entire year, with categories going horizontally across the top, and a row for each date of the year going vertically down. I ordered the categories from left-to-right by importance to me and my future family. First was tithing, then savings, then rent, then food, etc.

The sheet looked good. But then I thought, “Why not track our income here also?” So I set about making another sheet to track our paychecks coming in. As the weeks progressed, I would find more things I wanted the budget to do. For instance, I wanted to be able to see how much I had spent in each category for the entire year, total (since starting the budget), and an average per month. I thought that monthly average would help us budget realistically. It does. I also made an income statement that summarized all of our inflows and outflows. I really liked being able to see at a glance what our biggest expenses were, and where we might need to cut back.

Well, February came and we were married. We started the budgeting process and ran into the first problem: How did we know how much we had to budget each month? We didn’t always work 20 hours each week, sometimes 18, occasionally 23 or 24. Our income was variable and I thought this would immediately throw a wrench into our budgeting process.

We took some of our wedding money we had received from family and friends that equated to one month’s expenses and stuck it in our checking account. Because we now had one month’s expenses already sitting in our account, I knew we could actually lag one month behind what we spent. So what we made in March, we actually could wait until April to spend. This solved our variable income problem because we knew exactly what we had to budget in April - it had already been earned in March!

Through experience we also noticed that we occasionally received income from other sources, such as birthday money, selling a textbook back to the bookstore (for pennies on the dollar), or doing some extra work for someone. I knew it was necessary that each dollar that came into our hands had a home - a purpose. So I made another sheet that allowed us to capture these supplemental inflows, and budget them into spending categories. The budgeting process focused us on one number that the budget generated for us automatically: How much did we have available to budget for the month? Once we had allocated all of the money from that available pool into our categories, the budgeting process was done. It takes us about 20 minutes per month to knock it out.

The next problem with our budgeting process was that we had big one-time purchases. The biggest one for us was car insurance every six months. If I remember correctly, our premium was about $400 every six months. I made sure the categories in the budget acted like virtual accounts. So for our “Car Insurance” category, we would budget $66.67 ($400/6 months) into that category each month. At the end of six months we had our $400. Because we had already “spent” portions of it each month, cutting the check when the bill was due saved us some stress - and $15 - since we could pay in one lump sum instead of on a monthly installment plan.

The final real benefit of our evolving budgeting process was the way we handled spending too much in one category. It seemed like every month there were at least a few categories where we were in the red. We didn’t fret too much about them, just tried to do better the next month. What we ended up doing was this: If we went over $20 in Groceries, $10 in Electricity, and $5 in Entertainment, we would deduct the total ($35) from our money we had available the next month. Well, I shouldn’t say we deducted it - the budget actually just did it automatically. So if we had $2000 to budget in April, but had gone over in those categories in March, the budget would tell us we actually had $1,965.

The great thing about having this built-in “overdraft protection” was that we really didn’t feel the money was missing the next month - and we paid ourselves back for any mistakes. It has really helped us stick to the budget because you don’t even feel the budgeting system make its gentle corrections.

So, we don’t live paycheck to paycheck because we spend the paycheck one month later, we allocate every dollar to its “home”, we save for big purchases so we don’t even feel the stress, and we pay ourselves back for any mistakes we’ve made. This has allowed us to stick with this budgeting process for several years now. I won’t say we’re even close to where I would like to be financially (how could we? I’m still finishing up graduate school!), but we are on the way. Best of all, we have enough for our needs and even some wants. We talk openly about money. We haven’t gone into debt. We’ve saved an emergency fund of 3-6 months’ expenses, and we’re on our way to having a down payment for our first home once I finish school. I attribute all of this to the fact that we have followed these four rules of managing cash flow. I encourage each of you to give this system a shot also. You won’t regret it!