How to budget with pen and paper

Here's step by step how to budget almost entirely with pen and paper. We've stuck with it for years now …

(This post was originally published on December 31, 2017, and was updated August 29, 2020).

In the fall of 2017, my wife and I took Dave Ramsey's Financial Peace University through our church. The entire course rocks, but one thing that we started during the course was making and following a zero-based budget.

I'll come clean: making and following a budget isn't fun. We've been doing it for years at this point, and I still wouldn't say it's fun.

But, we're liking the results.

We see where our money is going. By planning where each dollar goes, we gain control over it.

How to budget the “old-fashioned” way

During Financial Peace University, we learned how to have effective budget meetings. Generally, one spouse is the “free spirit” and one is the “nerd.” The nerd is supposed to make up the budget (because they get into that kind of thing), and the free spirit is supposed to review it and change it.

My wife and I are both about half free-spirit, half-nerd, so we can both do either role. My wife did the budget up for the first three months, and she's very much a pen-and-paper type of financial person. She's balanced her checkbook manually, in the check register, for years (and still does). It works for her.

When I offered to do the budget while we were visiting my parents for Christmas, she pushed back, because the pen-and-paper system was working.

I really didn't argue. It was working, and we were following it.

In the rest of this post, I'll describe our budgeting system that we've followed for the past three months. It's almost completely pen and paper (though we do use a spreadsheet program to make doing the what-if's a bit quicker).

1. Print off the budget worksheets

You can get them here.

(No need to ask for permission to edit them. Just download them and have fun!)

There are five sheets in this document:

• An example budget for reference
• A blank budget worksheet for you to fill in
• An example expense tracker for reference
• A blank expense tracker for you to fill in (one category of expenses)
• Another blank expense tracker (two categories of expenses)

2. Gather income information

The first step is to gather income information.

Getting accurate income information is easy with pay stubs. It's a bit trickier with irregular income like freelancing-, farming-, or commission-based income (or something similar) because it's likely going to be a rougher estimate.

The total income for the month goes in the box at the top of the budget worksheet. The box is labeled with “TOTAL Income” and some arrows. In this example, the total income is $5,300.00:

3. Gather your expense categories and estimate the amounts

Next, gather as much expense information as you can.

Start with the non-discretionary expenses. Those are the expenses for which bad things will happen if you don't pay them. “Bad things” are: eviction or foreclosure, repossession, shut-off utilities, and dings on your credit report. Expenses that typically qualify are the mortgage or rent, the electric bill, the water bill, car payments, credit card minimum payments, student loan payments, etc. Most kinds of insurance fall under this category, too. (Depending on your beliefs, tithing is a non-discretionary expense.)

Many non-discretionary expenses are easy to estimate. Your rent or mortgage payment doesn't change much from month to month, for example. Others can vary more, like the electric bill or water bill.

Following that, hit the discretionary expenses. These are expenses that can take a hit, or be eliminated, in order to reach a balanced budget. Entertainment, cable, food (to some extent), household (to some extent), travel, and the like are discretionary expenses.

Some discretionary expenses can be messy to estimate, like food. The more receipts you have, and the more work you do in adding up the food expenses from all sources, the better your estimate will be. It doesn't have to be perfect, but it shouldn't be unrealistic.

Below is an example of some categories with estimates. This is a screenshot taken from the example budget in the download. The worksheet has places for two levels of expense categories that you can use. Some of the categories may apply to you, and others may not. There may be categories missing; feel free to change, delete, and add categories so that the budget is a great fit for you.

4. Adjust the amounts so that every dollar is accounted for

This is where your expense estimates meet the reality of your income.

The object is to get to zero — that is, budget explicitly for every dollar that comes in so you end up at zero after subtracting them all from your income.

After you've completed the Budget column as above, begin subtracting each amount from the Total Income amount, like this:

Total Income of $5,300 minus the tithe of $530 leaves $4,770. The rent/mortgage of $1,300 subtracted from this leaves $3,470. And so forth.

The goal is to get to the bottom with nothing:

If the bottom number in the “Get to zero” column isn't zero, then there's some adjusting to do. If the number is positive (not necessarily a bad thing!) then make up the difference by saving more, or by paying down your debt more. Or, double-check that you didn't forget any expenses!

(PROTIP: If you want to take advantage of the formulas in the linked spreadsheet to “get to zero” then go for it.)

If it's negative, that means that you've budgeted to spend more than you earn for the month. Sometimes it happens, but doing this month after month isn't sustainable. So, look at the shortfall and find a place to scale back to bring things back in balance. Some ideas:

• Eat out a lot? This can be a budget-killer for a lot of people. It was for us! Make eating out more of a special occasion rather than a regular occurrence and this will start to take care of itself.
• Have a lot of TV channels you don't watch? Consider cutting the cable or getting rid of it entirely. $50/month for us, cut just like that.
• Have a landline and cell phone?Can you get by with less? This can be a decent money-saver. We saved nearly $70/month by readjusting our cell plans and switching our landline service to a voice over IP service.
• What kind of groceries are you getting? We were able to cut out some convenience foods and add in a few that required some more preparation. And, we raided our pantry for a temporary boost to our bottom line. You may have more than you think you do hiding in your pantry or freezer. (Here are some grocery hacks for more ideas.)

5. Track your expenses against your budget categories

For the plan to work, you have to work the plan.

Once the budget is done, and zeroes out, then it's a matter of tracking your expenses throughout the month against what you've budgeted for the different categories.

Start with the budgeted amount, and then subtract the expenses as they happen. It's best to do this the same day each transaction happens, so that the balance will be current. It is, after all, a budget, and hence it's good to know when you have money to spend and when you don't!

Here's an example of tracking dining expenses for a month:

The $200 starting amount is the amount from the budget worksheet for the Dining Out category. Then, each transaction afterward decreases the remaining balance. The amount left in the budget is $11.04 — enough for a cheese pizza, maybe.

Each category from the budget gets its own ledger. If it's likely that there will only be one transaction out (like a cable bill) then it isn't really necessary to have a sheet for this, I suppose.

6. Carry over the surplus amounts you want the following month

If you're saving up for something, then you'll want to carry over budgeted amounts to the following month.

Let's say that we were planning for a birthday party and wanted a little extra money for the occasion. The $11.04 we didn't spend could be transferred to a Birthday expense line, along with other unspent amounts.

To do this with the worksheet, transfer the amount left at the end of the month to the Rollover column, and add it to the current month's budget:

This lets us save from month to month; this month we can spend $211.04 on dining out, without guilt because we saved up for it.

Another purpose of carrying over the money is to save for annual expenses a bit at a time. If we pay auto insurance at $900/year, we can budget $75/month for the prior 12 months to make sure we have that money available.

A third purpose is saving up for a one-time expense, like a vacation, or a car.

Still another purpose is “owe to yourself” in the likely event that life happens. Let's say that we overspend by $25 one month in a category. We can carry over a deficit of $25 (denoted with a negative sign, “-$25”) and pay back with the next month's budget. This should be the exception rather than the rule, and should ideally be paid back the next month by underspending.

7. Rinse, and repeat

When we were taking Financial Peace University, the budgeting lesson was the one with the commitment: We'd budget each month, every month, from then on.

To continue to get the benefit of purposefully setting aside each dollar, it has to be done consistently.

So, after doing the first month, learn from what went well, and what didn't, and do it again.

If you try our method of budgeting with pen and paper …

… I'd love to hear what works, and what could be better. Feel free to contact me or leave a comment below!