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.