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.

Everyone is always looking for the next financial advice tip, the best way to get rich, or in this economy, a new way to save, but often times when you start to use the B-Word they quickly start coming up with excuses…  “Budget’s don’t work for me, they’re not flexible enough.”  “I don’t have time to budget, or I don’t know how.  I’ll budget when I’m older.”

All these excuses however, while they may even be true, just keep you from reaching your financial goals, and consequently, many of your other goals as well.

One of the crucial components of a think forward, work backward life strategy, is the ability to visualize your ideal “end state” in any situation, and develop a plan to achieve it.  A budget is exactly that, with regards to your financial future.

While many of you may already budget to some extent, it is such an important part of living a deliberate life that it’s worth discussing.

Contrary to what you may be thinking, a simple personal/family budget does not take a significant amount of time (my wife and I spend a few hours a month working on it), doesn’t require special skills or accounting knowledge, and gives you all the flexibility you want, without any of the guilt associated with spending.  While you may currently feel guilty eating out, shopping, or buying other things you “want” but don’t “need”, now you can simply budget for those items, and gladly purchase them according to the amount budgeted.  A budget in and of itself is merely a plan for where each dollar will be spent based upon your priorities, nothing more.  One of the side effects of the increased transparency into your spending may be that you decide to revise your spending habits to bring them more inline with your short and long term priorities, but who wouldn’t want more control over their money, to ensure it gets spent on the things they value most!

There are as several varying theories on budgeting, each with a different emphasis, but regardless of the theory you subscribe to, there is always one resounding theme.  Just do it.  After you get started you can revise and modify your budgeting strategy based upon what works best for you, but waiting to start is the worst strategy of them all.

My budgeting strategy has been modified and refined as I use it, and continue to research other techniques and ideas.  Some of the more recent authors I’ve researched, and would recommend are below.

Dave Ramsey is a Christian radio and tv financial talk show host, and popular author and speaker.  His advice is immediately applicable and easy to follow.  He breaks things down into easy to understand lessons, and explains many more complicated topics including retirement investing, real estate, and insurance.  He is largely focused on getting out of debt, so if you are already mostly debt free his show won’t apply as much, but his examples can greatly help you get started with budgeting.

David Bach is best known for his book Smart Women Finish Rich but he has since written many other books including Smart Couples Finish Rich and various others.  He also has a practical approach to financial planning, but one of the most important things he brings into his financial planning advice is what he calls a “Value Circle”.  It is intended to allow you to determine what you value most, and ensure that your budget and financial plan are inline with those values.

Ramit Sethi is a popular financial blogger, and author of I Will Teach You to be Rich.  He has a very direct approach to saving money, budgeting, and becoming wealthy, but has some great advice throughout the book and on his blog to add to your daily lifestyle to ensure that you are setup for success in the future.

Convinced?  In my next few posts I will be providing more details regarding how to get started with a budget, as well as a sample budget template for you to use to get started, followed by a discussion on maintaining and adjusting your budget going forward.

Do you have any good budgeting tips or stories to share with me and others?  Please leave a comment below so we can all benefit from your experiences.

TFWB Action Plan:

1. Decide you want to control your money and have the ability to direct it to of your priorities, instead of wondering where it went each month.
2. Research some of the above resources, or others, to begin to learn more about the budgeting process.
3. Check back soon for additional information and resources to get started

Photo by Steve Wampler

Throughout life we are constantly faced with opportunities and challenges, decisions and turning points, and it is how we handle each of those situations that determines our future.   By thinking forward and working backward, we can ensure that we are adequately prepared for many of those situations, allowing us to act deliberately and concisely if and when they arise.

With this blog I will be discussing techniques and experiences related to thinking forward, as well as a multitude of topics that result from applying the philosophy.  It is intended to be nothing more than a discussion among forward thinking peers, as I am a student to all through the wisdom and questions, critiques and insight of others.