The first thing to do is list all categories of your income and expenses. By doing this you are creating a snapshot of where you are at the moment. Don't panic, we will get it organized. Trust me, the system works.

Look at your spending breakdown and assign one of these three priorities to each expense item:

Need to Pay: These are items that if you don't pay, there will be a near immediate negative effect. If you don't pay the electric bill for example, your lights will be turned off and you won't be reading articles on the web. If you don't buy food you won't eat. If you don't buy gasoline, your car will sit in the driveway.

Good to Pay: These are items that if you don't pay, there will be a negative effect in the near future. Think of your mortgage payment. If you fall behind, it will take at least ninety days in most states to foreclose and evict you. This category is still very serious and the items will move into the Need to Pay status fairly quickly.

Nice to Pay: Don't let the title fool you. All it means that if you have to decide which bill gets paid, this category is last. It still has to get paid, but it is less important than the top two.

Now list all of them on your budget worksheet in order, meaning all the Need to Pay items are at the top of the list. Our next step is to add all income sources that you can rely on to the bottom.

Add up the expenses and compute them as a percentage of your income. So, if you make $1000 per month and your rent is $500 a month, the percentage is 50%. It's important to create percentages so that modifications can be made quickly and uniformly.


Make your plan and write your checks early. Hold off on mailing them until three or four business days prior to the due date.

Get your discretionary funds in cash. When you are out of cash then you are done.

Do this for 90 days then move on to paying down your debt.

Create an emergency fund and add it to the Need to Pay category. Make sure you put a minimum of ten percent of your pay into an interest bearing account. Keep this up until you have at least six months pay in there. This is your emergency fund.

If your income exceeds your budget, anything left over is your discretionary funds. You may do as you please with them.

IF your expenses exceed your income, you need to reduce the expenses proportionately so you can live within your means. Example: Your total expenses are $1100 and your income is $1000. One thousand is ninety percent of eleven hundred. The left over is ten percent. So, your expenses need to be reduced by ten percentage points each.

Now, you have set up a personal budget. You need to stick to it religiously for at least ninety days. After that, you will be ready to move on to the next step in your personal financial recovery.