Previously we discussed the importance of budgeting, and (hopefully) dispelled the myth that it’s restrictive, difficult, or not necessary.  So what’s the next step?

Before we start entering your budget into a spreadsheet – there are just a few first steps:

1. As David Bach recommends, the first step is to take the time to list your values.  What do you value the most?  If you are married, be sure to discuss with your partner to ensure you are working towards a common goal.  What percentage of your income can you give to charity, church, or other causes you value?
2. Dream.  Using your goals as a guide, consider what dreams you may have, and what you’d like to buy.  Do you want to travel the world or buy a new car?  Buy a house, or make improvements to one you already own?  How much do you want to save towards retirement?  Do you have outstanding loans you want to save for and pay off?  Do you need to save to build up a nest egg, or a “just in case” fund?  At this point, do not limit your dreams.  Come up with anything and everything you would like, and prioritize your list.
3. Gather a couple of the previous months bills and paystubs to use as a baseline for your budget.
4. Plan any non-monthly expenses including gifts, travel, insurance (or anything else that is paid other than monthly).  These are some of the hardest expenses to budget for, and it’s important to make sure they’re included.

Once you’ve prepared the items above, it’s time to get down to business.

I was planning to include a link to the budget that we currently use, but while doing research for the blog found a number of other great templates as well, so I’ve included all of them.  Here is an example of the template we use (adapted from a sample here).  Additional examples I like, and may start using some day are here, and here.  Based upon your interest in budgeting, spending habits, and other factors, each of these templates has it’s benefits.  Using the template you selected, follow the recommendations below to fill in each of the line items.  Feel free to remove/add any items as necessary.

Virtually all budgeting books and advice include one fundamental concept that is often missed.  That concept is: “Pay Yourself First.”  The pay yourself first theory holds that when budgeting (and spending) it is crucial that you do not start by listing your known expenses such as housing, utilities, entertainment, etc.  Instead, start by including your investments, savings, and a portion to save each month for your dream items.  If you do not start by paying yourself, you can easily blow through all your income just by listing expenses, and will never get out of the monthly grind of living paycheck to paycheck.  Another key to getting out of living paycheck to paycheck, is to continually add to your “just in case” fund.  Unknown expenses can and will occur.  Medical, automotive, and other expenses will come up, and the just in case fund is the only way to avoid going in to debt each time they do.

Dave Ramsey, and a few other religious financial planners alter the “Pay yourself first” approach, to make it pay yourself second, while first giving to Church, charity, or other organizations.  I agree and recommend this approach highly.  I’ve found it easy to find the money to give, when it comes right off the top of the budget.

So, once you’ve given to others, and paid yourself, take a look at your monthly bills gathered above, and start to add them in.  Start with your critical expenses, moving down to things like entertainment, eating out, and shopping.

Review your list of non-monthly expenses, and calculate the amount that needs to be saved each month in order to meet those expenses.

Once you’ve got all your expenses listed, add everything up, and subtract from your income.  How’s it look?  Are you still in the black (positive) or are you over your budget (in the red)?  If you’re in the red, that’s ok, we’ll get it back in check.  Take  a look at your expenses to see where you may be able to cut any expenses.  Can you reduce some or your entertainment or other discretionary expenses?  If not, you may have to review the items you paid yourself, based upon your priorities.

Congratulations – you’ve thought forward, and worked backward with your finances.  The next post in the series will cover maintaining and reviewing your budget monthly, to ensure that it’s accurate, and that your spending is inline.

Do you have any questions on your budget or the process?  Have you done a budget before, and if so do you have any differences in how you’ve done it that you can share with the other readers?  Post a comment below, we’d love to hear from you.