About 5 or 6 months ago, I sat down and decided that I was going to finally take control of my finances. Yes, I did. It was a crazy decision to make, and it was before the start of the great economic collapse of 2008, but I did sit down and vow to take control of my finances. Here’s how I did it.

I live in a 2-income household with my wife and my two dogs. My older dog, Taz, is somewhere around 10 years old, I think. The younger puppy will be two years old on April 1 (yes, he was born on April Fools Day, and I think that we were the fools). Between the two of us, we’re sitting in what I consider to be the upper-middle class range and our pre-tax income is somewhere around $140,000. Now you’d think that was a lot of money, but it doesn’t seem so because we haven’t been keeping a lot in our savings. Our lifestyle helps out with that.

It seemed ever since mid-2007, that my wife and I had been on a downward financial spiral. All of the money that was coming in also seemed to be going out just as fast. It’s not like we weren’t spending it. We took trips to Disneyland and the beach in California, and we went to Maui for Christmas in 2007, so we were actually spending the money. We also run a cash-based house. We have very little credit debt outside of our mortgage payments and car loans. But the big thing was that I wasn’t seeing the long-term trends of where our money was going and why it wasn’t going to savings, because on paper, we should have had a lot of extra money.

One day I sat down in front of my computer and popped open Microsoft Excel. Excel’s probably the greatest application ever built because there is nothing that it can’t do. I could build full business applications using Excel as the user interface if anyone would let me, but they haven’t yet, so I digress.

I started off with a blank worksheet, renamed the worksheet to 2008 Budget, and I created a table with the following columns:

• Date
• Category
• Description
• Credit
• Debit
• Balance

The Date field stores the date when money is expected to move into or out of my account. It’s the day that either I or my wife get paid, or expect to receive money, or the date that we expect to pay a bill.

The Category field is used in case I decide to analyze the budget with a pivot table. It’s basically a set of descriptive categories such as Salary, Mortgage, Utilities, Weekly Expenses, Other, etc. It’s just helpful descriptions for me to use for later analysis.

The Description field is a description of a bill or the name of the creditor being paid. For example, when describing the paycheck I will document whether it’s from my company or my wife’s employer. If I’m paying my mortgage, I’ll put “Countrywide” in the description.

I track Credits and Debits in separate columns just for visual clarity. I make both of these columns Currency columns in Excel, and I format negative numbers in red and within parenthesis for visual impact, so instead of seeing $-200, I instead see $(200). Credits, in my accounting scenario, match what my bank account’s record is and is income that I receive or expect to receive from salaries or bonuses, and debits include all payments to others from my bank account. Transfers to my savings account are also counted as debits on this budget, because my budget is meant to track disposable income that can be used for food, entertainment, clothes, etc., and by putting money in savings, I’m hopefully safeguarding that money from being disposed. I track the savings account separately. The budget only includes my checking account, unless I need to borrow money from savings, in which case I show that on the budget as a credit. But the point of budgeting is not to have to borrow from savings if everything is planned right and both my wife and I keep to the budget.

The Balance column is a running balance. After every credit or debit, I add the credit or debit to the previous balance to get the new balance. By keeping a running balance with each transaction in my budget, I can tell if paying a bill or spending money from my checking account may potentially push me into a negative balance on my budget. If I see that, I can re-evaluate the spending. For example, if I’m going negative during a week that may potentially prevent us from buying groceries or having money to buy gas to get to work, I have to look at what’s being paid to see if something can move. Some of my bills, for example, have grace periods where they can be paid within a certain window without getting a late fee. I might be able to move one or more of those bills to the next week when we have more money. My wife and I are fortunate at the moment in that we both get paid every two weeks, but our pay cycles are one week apart, so there’s always money coming in at the end of every week. In cases where there’s nothing with a grace period, you have to look at whether it’s reasonable to move a bill and risk a late charge. It may also move you to call the credit and explain that you’re short on funds and ask for an extension to pay a bill. In a couple of cases where I’ve had to do this, I’ve found the creditor to be very friendly about this when I explained to them my budget process, because they knew that they were going to get paid, but just a few days later.

The other point of the Balance column is that it helps me to identify trends further out that now. In Excel, the Balance column is calculated such that a change to a previous credit or debit will affect all of the Balance values in the budget. For example, if Balance is in column F, and Credit and Debit are columns D and E, then the value of the Balance column is defined to be “=$F3+D2+E2,” for example. Income is recorded as a positive number in the Credits column, but all Debits are recorded as negative numbers. But as I move payments around or alter the amount being paid, I can see what the long term effect is of that money moving into or out of my accounts. This lets me plan months down the road if I notice that I’m going to be running short, or if I expect to have excess income that I could potentially move out of disposable spending and put into savings. My wife is also a teacher (for now, at least), so I can anticipate how her not working over the summer may affect our finances.

Once the columns are set up, I started by entering in all of the future paychecks that my wife and I expect to receive, and the date in which we expect to receive them. For both of us, our employers official pay day is on Friday. However, we both have direct deposit to our joint checking account, and our bank actually makes the funds available to us a day earlier, so we see the funds in our checking account on Thursday. That’s helpful to know also in case we hit a rough week and come up short, because we could borrow from the next week for two days if we needed to, but hopefully we won’t have to.

After entering in all of our paychecks into the budget, I then went through all of our fixed obligations, such as the mortgage payments, car payments, electricity, cable + phone + Internet (we have combined service through Cox Communications), gas, home owner’s association fees, subscriptions, security, etc. I put these in the budget with the anticipated date that they’re due. If I don’t know the exact date, I use my checking account records for the previous month to see when they were due in the last month, and I estimate when they’ll be due in the current month and future months. You can change the dates later on. I put in usually six-months of paychecks and expenses, but you can always go one year out and change it if necessary.

Once all of my expenses and paychecks are entered into the budget, I sort the worksheet by the Date field. This will put all of the income and expenses in order. When starting a budget, it’s also helpful to next insert a line at the beginning of the table which is going to hold your starting balance. Make it either a positive or negative number to correctly set your budget with how much you actually have. This is because you may not start at $0. I like my budget to start on the first of the month, but in 2009, my first paycheck was received on January 2nd, not the 1st. I also had some outstanding charges from the end of 2008 that I didn’t want to be included in my 2009 budget figures, so I put in a negative offset as my starting balance to correctly align the budget to the state of my bank account on January 2nd.

Now you’ve accounted for your income and you’re fixed set of bills that you pay every month. The next important category is to account for living expenses. Living expenses are the gas that you put in your car to drive to work, the groceries that you buy, the trips to Starbucks that you make in the morning to get coffee, the restaurants that you go to for breakfast, lunch, or dinner, and the entertainment expenses such as taking your wife to the movies on date night. Those are all what I consider “Weekly Expenses,” and I created a category with that name.

I break my living expenses up into one-week spans because it lets me fix problems earlier. The problem with your weekly living expenses versus fixes bills is typically the bills are static, or they will have smaller variations from month-to-month. However, living expenses are unknown and volatile. You may have extra expenses in one week that may completely blow out your budget for future weeks and your spending patterns may force you to move bills around to make sure that you have enough money to eat.

In my budget, my “budget weeks” where I budget for living expenses run from Saturday to Friday. I count Saturday as the first day because we tend to spend the majority of our money on the weekend because we may go out to dinner or to the movies and may spend half of our budgeted money on groceries on Sunday. During the week, we tend to spend less as we have already bought some groceries and tend to stay home more at night. We’re also daily shoppers, so if we cook at home during the week, we usually pick it up the day that we’re going too cook it, and we usually average going out to dinner at least once a week.

So pick a comfortable number that you think that you can live with, and decide when your “budget weeks” are, and then enter them into your budget. I usually specify the date as being the first day of the budget week, which will always be a Saturday. For my budget, we try to stick to $400 per week, which is much easier with the current price of gas than it was a few months ago. Resort when you’re done and see how your running Budget values have been affected. Move bills around if you need to in order to keep a positive Balance, or sit down and figure out how you can deal with a negative balance if nothing can be moved. When weeks pop up where we have special events, such as birthdays, anniversary, Valentine’s Day, Thanksgiving, Christmas, New Years, I’ll typically allocate more money to the budget to account for these extra events.

You may feel an urge somewhere to resort to credit to solve a negative balance. Try to resist that urge if you can. My rule is that if I hit a spot where I’ve gone negative, and I can’t move anything, I’ll only move it to credit if I can comfortably pay it off within 30 days without pushing me negative again. This will happen quite frequently as you start the budgeting process. What I found is that as time went on, with the budget I was getting to the point where my wife and I were finally spending less than we were earning, so I was able to delay putting money into savings in order to catch up and it was worth it to use credit to get a 30-day buffer. But I paid the bills of as soon as I comfortably could, without letting them sit on my credit card and earn interest.

Congratulations! You now have a working budget. For the most part, this will help you track your fixed or known expenses, and it will let you see how much extra money that you have over that becomes your disposable income for savings, paying down debt, or for emergency spending. The next task is that you have to track your spending and analyze where the money’s going.

To track my spending, I created a new worksheet in the same workbook and I titled the worksheet “Actual Expenses.” I created the following columns:

• Week
• Date
• Category
• Subcategory
• Description
• Amount

This worksheet only records money that my wife or I spend out of our joint checking account. It does not track income. Since all of the amounts on this worksheet are expenses, I record them as positive numbers which will help with my analysis. The Week, Category, and Subcategory columns are useful because I will typically create a pivot table report based on the expenses so that I can look from week-to-week at where we are spending our money. In the main budget, I mainly lump all of these expenses into “Weekly Expenses,” but in this worksheet and in the pivot table, I want details about who’s getting all of my money.

For example, I may have a category named Weekly Expenses that tracks my living expenses. For subcategories, I may use Gas, Groceries, Starbucks, Entertainment, Dogs (have to track Dingo purchases for Taz and Riley). I may create a category for unplanned, or Other expenses, and for subcategories use Books (my wife and I like to read), Clothing, Cars, and Household.

In the week column, I put in the range of dates for the budget week which runs from Saturday to Monday. For example, I’m writing this post on the first day of a new budget week: Saturday, January 3, 2009. In this column, I’ll enter 1/3/2009-1/9/2009. This week range will help in the pivot table, because it will allow me to compare one week to another to see how our spending habits change.

As we spend money, I’ll sit down usually once a day and will record the transactions from my online checking account record and put them into this worksheet. It helps also because on ATM transactions, my bank will usually only specify the address where we spent money, so I can figure out where we spent it and recall why we spent the money in order to better categorize and analyze our spending patterns.

After recording a week’s worth of spending, I’ll create a pivot table from the expenses table that will allow me to better visualize our spending patterns. This helps to realize how much money that you’re spending at certain places. For example, when I started my budgeting process, my daily work routine was to go to Starbucks in the morning. Every morning I bought a blueberry muffin and a bottle of orange juice. I was spending about $5 per day, $3.50 of it for the small bottle of orange juice. When I go to the grocery store to buy food for my house, I usually buy a large bottle of orange juice that will get us through the week. For this large bottle of orange juice, I spend about $4 per bottle. Looking at this, I was paying Starbucks a similar price for orange juice, but I was receiving only a small fraction of the larger bottle that I could buy at the grocery store. Given this information, I was able to change my spending pattern and I starting bringing orange juice with me to work from my house, thus saving me around $20 dollars per week that I could instead use to go out for a quick lunch once or twice per week. Using pivot tables help you to analyze the true spending habits that you can’t see just by entering your expenses.

This budgeting and tracking process requires a lot of time and effort, but the advantage of it is active monitoring. It requires work to keep track of your budget and analyze your spending patterns. Tools like Quicken are good for recording past spending, but I didn’t see that it did a lot for me to really understand my spending patterns or forecast the future balance of my checking account. Using this budgeting technique, I was able to take control, see where the money was going, and turn things around for the better. It took a few months to make things better, but my wife and I had a great Christmas season because we finally had control of our spending and did a lot of good things. 2009 is also looking like a good year for us, because we know where our money is and where we will need it to be.