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Step 1: Make a Budget

Make a Budget

Budgets are so exciting. No, really!

Every time I talk to people and bring up the topic of budgeting, their eyes seem to glaze over. I'll admit, it's not usually the most exciting discussion topic, but it can be!

Talking with friends and coworkers over the years, I've been amazed at how many of them don't even know what they spend each month. It's hard for me to fathom living like that, but I've learned that I'm probably in the minority when it comes to budget exuberance.

In my opinion, lowering expenses is just as important as increasing your income.  Here's why:

  1. Lifestyle Creep - Typically when people get a better job or come into some money, they find a way to spend it. What's worse is they work that additional income into their monthly spending habits, which are hard to change later on.
  2. It's easier to bring in more than you spend when you are spending less. Sounds obvious, but it's a pretty powerful perspective to have when you think about it. I always compare it to losing weight. Is it easier to pass on that can of Coke at lunch, or run for two hours to burn it off?

I'm going to assume that anyone reading this knows what budgets are and how they work. What I want to discuss are the line-items in a budget and how to maximize them. I'm going to list my personal budget categories, and hopefully, generate some discussion about each one. Who knows, there may even be entire posts about some line items.

Here are my monthly expense categories, and the guidelines and tips I follow. I think they categories are pretty typical for the middle-class American family, but yours will probably differ a bit:

Auto & Transportation

Car Payment

For most Americans, a car payment is the second largest household expense.

I belong to the camp that says you should never take out a car loan. Period. I'm also opposed to buying new cars in almost all circumstances. Optimally, whenever I need to replace a vehicle, I look for one that's about 10 years old. Older vehicles have typically hit the bottom of the depreciation curve. Modern vehicles are capable of going hundreds of thousands of miles, but most Americans still have the mindset that carried over from the mid-twentieth century that cars were only good for about 100,000. It may have been true then, but it's not anymore.


Remember those GEICO commercials? Well, there's some truth to them. Most people don't pay attention to their car insurance costs after they sign up. Many companies slowly increase your insurance rate each year. Getting a quote or two each year really could save you 15% or more on car insurance!

Gas & Fuel

This expense basically comes down to a) what you're driving, and b) how much you're driving.

Obviously, a big SUV is going to burn more fuel than a little hatchback. Take a minute to analyze your vehicles and ask yourself if that Suburban is really necessary, or if you could downsize a bit.

If you really want to start saving some gas money, start tracking the miles you drive. Often people can save a few trips and a couple hundred miles each month by planning out their shopping and errands a little better.


For awhile, I was working downtown and had to pay for parking. I hated it. Costs will vary depending on where you live, but there's almost always some money to be saved by doing a little research. I parked about 4 blocks away from my office for a few months before finding out that there was free parking 5 blocks away. I haven't paid to park since.

Even better, see if there's a way to take public transportation to work, ride a bike, or park at a park-and-ride lot to save some extra cash.


Vehicle registration is a hard expense to avoid. The only thing I can think of is that older cars cost less to register than new ones. This is yet another hidden cost of buying a new car that people often forget about.


If you own a vehicle, it's going to need to be repaired at some point. It's true that newer cars need fewer repairs than older ones, but the difference in maintenance expenses between old and new vehicles are typically nowhere near the cost of a monthly new car payment.

If your check engine light keeps coming on, there's a nifty tool you can buy called Automatic that will diagnose the problem for you, so you don't have to go to a shop every time. It can save a bunch of money if you are paying for diagnostics frequently:


Coupons. When it's time to services your car, always look for a coupon before heading in to the shop. You can typically save yourself about 10-20%.

Shop around. I’ve seen oil changes range from $29 to $79 for the exact same service!

Public Transportation

If you live in a place with public transportation, it's almost always going to be cheaper than owning a car. Take a look at all of the above expenses, total them up, and you’ll see that you're probably going to save a bundle by taking the bus or riding the train. Also, check with your employer or school for discounted passes.  Sometimes you can get a huge discount or even a free pass.

Bills & Utilities


Most people live in an area where there's only one provider of electricity. If that describes you, you don't have the option of shopping around. There are a few things to try that could shave a bit off of your electricity bill:

  1. Look into solar.  In some places, there are pretty amazing tax rebates for installing solar on your house. If you live in an area that gets a lot of sunshine, and you own a house with enough usable roof space, solar might save you a little on your monthly bill. The other nice thing about solar is that your rate will be fixed, and your payments will be going toward owning your source of electricity.
  2. LED light bulbs have come a long way. At the time of writing, they are nearly as cheap as incandescent bulbs and use about five times less electricity. Check Walmart, Lowes and Home Depot for the best prices. The inexpensive ones are usually not out on display, and typically on the lower shelves.
  3. Newer appliances use a lot less electricity, especially refridgerators. If it makes sense, consider replacing those old appliances with something more efficient. The cost and benefit may not make sense though, so do a little math before you pull the trigger.

Typically you can't change your water provider. With some conscious effort, you can reduce your water usage and lower your bill. You can also look into more efficient toilets and shower heads, as those are typically the biggest water wasters in a home.


Some areas have more than one garbage collections service to choose from, so do a little shopping around. If you are paying for more than one can to be picked up each week, think about how you could reduce your waste down to one can. Typically, the biggest culprit in this area is packaged foods, which come with a tremendous amount of packaging waste.


There are few ways to save on internet. If you are lucky enough to live in an area with multiple providers, shop around for the best deal. In some cases, you can save a bundle by switching providers every year.

You can also call your current provider and ask for a rate reduction. If they say no, you can cancel and sign up under your significant other or roommate's name to take advantage of their latest promotion.

Natural Gas & Propane

In the case of natural gas, the best thing I've found to save money is installing a smart thermostat. These can significantly reduce energy costs in your home.

Propane is usually available from multiple providers. Recently I shopped around and found that my current provider was charging nearly three times more per gallon!

Mobile Phones

The common knowledge here is to look into Google's Project Fi or Republic Wireless. If neither of those carriers does it for you, the other way to save money is to team up with a few others on a family plan.

Wireless rates are constantly in flux too, so if you aren't tied to a specific carrier, try doing some price comparison shopping, even if you are under contract. Some carriers will buy out your contract if you switch to them.

Banking Services & Fees

Bank Fees

If you are still paying fees to have a checking or savings account, move your money to a different bank or credit union. Nobody should have to pay fees for these services anymore.

If you are constantly being hit with overdraft fees, your number one priority should be figuring out how to stop getting them. These fees will drown you very quickly if you are already just barely treading water.

Cash & ATM

My wife and I don't carry cash very often. We typically analyze our budget monthly by reviewing our bank and credit card accounts. When we buy things with cash, it's very difficult to track where it went. Plus, we're always trying to rack up credit card rewards, and spending cash doesn't help with that.

We decided to pay ourselves a small cash allowance each month. We use cash for random indulgences usually, and they are typically things that we aren't budgeting for. We've found it easier to just set aside this amount each month for mad money, and not worry about tracking where it goes.

Credit Card Interest

Credit card interest should be one of the first things you attack when you are trying to become financially independent. It's working against you 24/7, and it's typically charged to you at an extremely high-interest rate. If you've got any kind of balance on your credit card, pay it off as quickly as possible.



We like to lump all books into the "education" category. This includes school books, and any other books or audiobooks we end up buying. If you aren't in school, there's an easy way to get this line item down to zero - visit your local library.  Most libraries have all kinds of freebies too, like state park passes, mobile audiobook downloads, etc. If you haven't been in awhile, go check it out.

Tuition & Fees

There are all kinds of ways to reduce your tuition costs. Look into scholarships, grants, assistantships, etc. Almost anyone can get a discount on their tuition if they just take the time to do some research. Check with the school's financial aid office for more ideas.

Student Loans

Student loans are one of the few loans that I tolerate. Investing in your education is one of the few things that people borrow money for that will actually pay you back. Even though I'm not totally against getting a student loan, there are definitely times when they don't make sense. For example, if you are going into a career that will earn you about $40k per year, is it worth paying $120k to go to school? In many cases, there are much better options than going to a 4-year college for all 4 years, so again, do some research.



In our budget, this category includes any books, ebooks, or audiobooks we end up buying. There's an easy way to get this line item down to zero - visit your local library.  Most libraries have all kinds of freebies too, like state park passes, mobile audiobook downloads, etc. If you haven't been in awhile, go check it out.


Movies can be expensive. Whether you are renting, buying, or seeing them in the theater, they can add up quickly. I find that video streaming services offer the best bang for the buck.

If you are into going out the theater, checkout Currently, they are offering unlimited theater visits for about $10 a month (this price probably won't last forever). While you are there, try not to visit the concessions stand, unless you've budgeted for it. The food at movie theaters is priced higher than nearly anywhere else on the planet!


I've not a big audiophile, and I don't typically buy music. If this is something you're spending a lot of money on, consider using Spotify or Pandora as free listening options.

Museums, Parks, Etc.

We take our kids to museums and parks a lot. To pay for these visits, we've found its much cheaper if we buy annual passes rather than day passes. This saves us money in two ways: 1) The cost per visit is lower 2) We end up going to these places a lot, rather than going somewhere else where we end up spending even more money. Another thing we've done is ask our parents to buy these passes for our kids for birthdays or Christmas, instead of toys. That's a win-win for us because it provides our kids with hours of educational learning throughout the year, and it keeps junk out of our house!


Fast Food

Fast food, in our budget, is any place with a drive-through. Whenever we go to one of these places, it basically means we just felt like being lazy that day. Inevitably, we always end up with a few of these trips in our monthly spending. If at all possible, we try to avoid any spending in this category. We do; however, stop by and let the kids play in the play places frequently...


There are a few strategies we follow to save money on groceries:

  1. Shop from a list - don't just show up and the store and buy whatever looks good
  2. Try an online meal planner - these will help you limit your food spending to things that you will actually cook, and will limit the number of random impulse items you throw into your cart.
  3. A lot of people love the challenge of coupon shopping. We've never done that, but there's definitely some room to save some money there.

The main thing to focus on when buying groceries is the cost per meal. We try to average about $2 per meal per person. Some meals can be a little fancier, some a little simpler, but on average, that's a pretty challenging and do-able goal for us.


Who doesn't like visiting a nice restaurant every now and again? The important thing to remember here is that restaurants are expensive. You've got the cost of your meal, drinks, and a tip all glaring at you the moment you sit down. If you like going out to a restaurant every now and then, just make sure you set a budget for it and stick to it.

Gifts & Charity

Tithes & Offerings

Whether you are religious or not, I think it's beneficial to participate in giving. This is so important to us, it's the first payment we make each month. Whether it's 10%, or something else, consider making this a part of your budget if it's not already.

Family Gifts

There are always people in our lives that we want to buy gifts for. Gift giving is important, but gifts don't always have to come with a big price tag.

Consider some other ways you can give to others that don't require going to the store.

Another thing to think about as your circle of relationships expands over time, is who do you really need to purchase gifts for? Do you need to buy a present for every niece and nephew on their birthday? Do your siblings really care if you buy them presents as they get older?Some extended families can get extremely large, so if you don't set some limits, you're going to break the budget in this category.

Health & Fitness


Dental costs can be significant, but there are only a couple of ways to pay for them. Typically, people with pay out-of-pocket, or they'll have insurance.

I found dental insurance to be a waste of money when Harmony and I were first starting out, but once kids came into the picture, it suddenly made mathematical sense.

The biggest things to consider about dental care are:

  1. Preventative Checkups - These are really important. Going in for a bi-annual checkup and cleaning isn't cheap, but in the long run, it's beneficial in preventing extremely costly dental work if a problem goes unnoticed for a few years.
  2. Paying with Cash - Most dentists charge a lower rate if you pay with cash. Using your insurance to pay for dental care creates additional work for the dental office, so they usually pass those costs on to you and your insurance company.

The U.S. healthcare system currently provides free preventative checkups for everyone. Take advantage of them. Other than those visits, the fewer trips to the doctor you can make, the better. To reduce your costs, consider what you could do to improve your health through healthy eating and exercise. This part of your budget can explode if you aren't practicing healthy habits and visit the doctor often.


Hospitals are ridiculously inefficient and expensive. Avoid them if you have other options. Things to consider for planned hospital visits:

  1. If you're planning to have a child, look into local birth centers. These are amazing and can save you a bunch of money.
  2. Many people look overseas for medical health. For example, some procedures can be performed in Costa Rica for much less. Even if you factor in travel expenses, it's often cheaper to go overseas for planned medical procedures.
  3. Many healthcare companies offer instant care clinics that you can visit in an emergency. They are typically much cheaper than visiting the emergency room.
Health Insurance

Health insurance is very expensive. If you have the option to select a high deductive plan with an HSA, that's almost always the way to go. HSA's are probably the best tax-sheltered investment accounts available. I max out our HSA before any other account because it isn't taxed going in, and it's not taxed going out, as long as you are using it to pay for medical expenses. It's the only account I know of that's completely tax-free. Plus, there are strategies for gaining access to your HSA for other expenses.


Always buy the generics and shop around. Walgreens and Walmart offer the same medications but at many different prices.

Holistic & Misc.

If you're into holistic medicine, it can often save you a lot of dough. Sometimes you'll be able to find a simple holistic fix for something that would cost hundreds of dollars at your local doctor's office.

Gym Membership

Gym memberships can be expensive, and you can often get similarly fix by just exercising at home. That said, my wife has a gym pass simply because it also provides a means of childcare. Some days, that hour of time away from the kids is invaluable.

If you have a gym pass that you aren't using, either get rid of it or start using it.


Life Insurance

Life insurance is something that can be debated at length. I'm of the camp that recommends that you a) have life insurance, and b) buy term and invest the difference.

Those I see some value in whole life insurance, it's just too expensive and provides pathetic, though consistent, investment returns.

Personal Expenses


If you really want to be frugal, get your haricut at home. This probably doesn't work for everyone, but if you can swing it, it'll save you quite a bit over the course of a year.

Beauty Supplies, Spas, Etc.

My wife loves to indulge in one of these expenses every now and then. I haven't found a way to avoid them yet :)



If you've got pets, take care of them, but don't let the vet upsell you when you go in for a visit. Without fail, they'll try to get us to buy five different things when we bring our dog in for booster shots


If you're into buying junk for your pet, don't sop at pet stores. Many of the same things can be found at dollar stores, Walmart, or thrift stores.



There are two camps for saving money on clothing:

  • One camp says that you should only own a limited number of outfits, but that they should be quality, well-fitting outfits that you love to wear.
  • The other camp is the thrift shop crowd that buys higher quantitiy, but sometimes lower quality clothing.

In both cases, the goal is to avoid just going shopping at retail stores for clothes that you don't need. Most people have a closet full of expensive clothes that they don' even wear.


It's important to have a budget for hobbies, so you don't overspend, but are still able to do things that you enjoy. Just keep it in balance.

I good rule of thumb here is not to buy these types of things on impulse. If you want something, write it down and wait 72 hours. If you still want it, go out and buy it. But, if after waiting 3 days you decide you don't really need it, then you just saved some money!

Household Supplies

I like to break these kinds of things out from my grocery budget. These are things like diapers, dish soap, garbage bags, etc. It's easy to overbuy in this category, so make sure you keep an ey



Lodging is the most expensive part of most vacations. Before you book that hotel, try, or do some research into "travel hacking" to see how you can spend your credit card reward points instead of your cash.

Travel Expenses

"Travel Hacking" with credit card points is the key to saving on travel expenses. Whether it's arifare or rental cars, you can use your travel rewards points to pay for it.

Misc. Spending

When you travel, you probably buy things you wouldn't buy while at home. It's ok. Just make a budget, and follow it.

After reading through some of these, hopefully you have a few ideas of how to save a buck or two. My challenge to you is to pick one or two, and take action. The more you can lower your expenses, the quicker you'll be able to become financially independent.

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