5 Steps to Making a Budget That Works

You have taken the plunge and decided that you are going to make your money behave. From my previous two budget posts you know the budgeting pitfalls to avoid and you are excited about the many benefits of your budget. But how do you actually do a budget? These five steps will help.

1. Add up your monthly take home pay.

If you are married, include both incomes. If you get paid weekly, budget four pay checks. If you get paid bi-weekly, budget two pay checks. Yes, there will be months when you get an extra check and you need to have a plan for what you will do with that extra check, but your monthly budget is only for the checks you know you will be getting each and every month.

2. Add up all of your monthly expenses.

Start with your essentials, such as house payment, car payment, utilities and groceries. End with non-essentials such as entertainment, vacation, or eating out. Peruse your check book or your money tracking software to see where your money has been going. Be realistic. If your budget does not reflect reality, it will not work.

3. Subtract your expenses from your income.

If you have a positive number, you need to plan on how to use that money (pay extra on debt, build emergency fund, etc.). If your difference is negative, you will need to trim that amount from your expenses. This is called a zero based budget because you are making plans for every single dollar: no excess and no shortfall. Your expenses, therefore, must equal your income.

4. If married, it is critical that you both speak up & be heard.

Why? The obvious reason is that once the two of you agree on the numbers, you are also agreeing that you are going to live by those numbers. The less obvious reason is that when you two agree on your budget you are also agreeing to your values. Things might get testy but take advantage of the budget process to discuss your differences. Your marriage will be better for it.

5. Give it some time.

Many people give up after the first month because “it didn’t work.” You need to go into this process expecting that the first month will not work. Why? You didn’t think of everything first time through. Therefore, plan now to revise it after one month and plan to revise it again the following month. It normally takes three months to make a workable budget, and even then you will need to do some fine tuning from month to month. We are talking about 15 minutes a month…certainly not an unreasonable commitment when you weigh the benefits.

Bonus hint: Use envelopes to budget for the items that are difficult to track, such as groceries, eating out and gasoline. Label the envelopes, put your budgeted cash in those envelopes and use that cash throughout the month. If an envelope gets empty before the month is over, you will know that you underbudgeted that item. Adjust accordingly next month.

Hey! I am proud of you! You are on the path to changing your life forever.

Photo by Claudio Matsuoka.


By , on Jul 22, 2009
Joe Plemon runs a biblical based blog on personal finance called Personal Finance By The Book. If you like Joe's post, you can subscribe to his blog here.


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  1. Nice post! The key to a marital budget is good communication . . .

  2. bob:

    A crucial and more important part missing from the plan in the post is how much of the budget should you devote towards retirement. The very minimum is that 10% of your income should be going to some sort of retirement fund. Not an emergency fund, nor a college fund, but your retirement fund. If you manage to save $30,000 by the time you are 30 years old, that money will compound and grow to be worth well over a million dollars by the age of 60. So for the cost of a typical family car, you can have a secured retirement with a comparatively small initial investment. If you haven’t saved for retirement, then the more you will have to save in order to be able to retire. A retirement fund is the most important part of your financial well-being and should automatically be deducted from any budget.

    There are numerous financial budgeting sites such as mint.com that provide tools that will make managing your finances easier. Plus a lot of these tools are free to start with and easy to use.

  3. I think that the most important part of budgeting is to start, and as you point out, the second step is to make sure you and your spouse are on the same page. If you are willing to try and keep trying then it gets easier every month.

    I checked out your blog and subscribed. Good luck and keep on blogging!

  4. Brent:

    I think number 5 is crucial. Those first few months are the hardest, after you’ve gotten the hang of things it is so much easier and less stressful.

  5. Honestly, I think there are much better websites with budgeting information than this. The first step should be to look at 3-6 months of your financial records to determine where money goes– that should nto be step 5! And running out of money before the end of the month- means you spent more than you had, not that you “didn’t budget enough”. Savings should be an “expense” line in a budget- pay yourself principle which is well regarded in many institutions. Debt payments should also be considered a regular expense for people who have them. And finally, as for including both incomes in a two income household- I understand for most people this is necessary (this is how I grew up, and my parents used the envelope system but kept their money separate)—- BUT, learning to live off one income and using the other exclusively for debt payments, savings or investments is a good way to get used to living below your means.

    • I must say I agree with you Jessica, learning to live off one income is definately the way to obtain financial freedom! Rememeber, one person could loose their job, becom ill etc what would happen then if you are only used to living on two incomes.

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