5 Steps to a Successful Budget
Creating a budget that you can stick to is easy if you follow these 5 simple steps
Step 1. List all of your income
Your budget is your plan on how you will spend your money. The first step is the easiest of all of the steps. Simply list every source of money from both spouses, and the Net (take-home) dollar amount for each source. Key points to remember:
Include primary jobs, part time jobs, side hustles, investment income or dividends, and any other sources that bring money.
Your Net Income is the portion of your income that passes directly through your hands. This is the amount deposited into your bank account, or written on your paycheck. This is your take home pay, after all automatic deductions. This is the income that we will use to create your budget.
We are not making a budget based on Gross Income. Your Gross Income is what you earned before taxes or other deductions were taken out. Since you never have this amount in your hands, we cannot make a plan to spend it.
Step 2. List all expenses
We learned that a budget is a written plan of how you would like to spend your money. In order to do make such a plan you must have an itemized list of everything that you will spend money on. This will require a little more effort than step 1. In step 2, you will list everything that you would like to spend money on. Every bill, every expense, including expenses that do not have a monthly statement or bill. The goal is to make a comprehensive list of all expenses not to leave everything out.
Make you list of expenses by category. This will make it less likely that you will forget items.
There of 2 types of expenses, make sure to include both:
Bills: A recurring statement or bill: Ex: Car payment, Electricity, Mortgage
Cost of Life: No statement or bill: Food, gasoline, savings, haircuts, clothing, toiletries…
Include irregular or infrequent items that do not occur every month such as birthday or christmas gifts, kids school pictures, etc…
During this step, you are not making a decision about what should or should not be included. You are simply listing everything.
Step 3. Prioritize each expense
In step 3 we will determine which expenses are the most important. Prioritizing your expenses will guarantee that the expenses that are the most important to you will always be paid. During this step you are not deciding whether to include/exclude or adjust expenses. You are simply agreeing on the importance of each expense relative to your goals and other expenses. Step 3 will work only if you have done a comprehensive job of listing all expenses in step 2.
Assign one of the following Priority Levels to every expense:
Priority 1 - Critical Needs
Ex: Mortgage/Rent, Utilities, Food, Tithes
Catastrophic events occur if priority 1 expenses are not paid
Priority 2 - Wants
Inconvenience or annoyance if priority 2 expenses are not paid
Ex: Weekly haircuts, new clothes,
Priority 3 - Luxury
No consequence if priority 3 expenses are not paid
Ex: Vacation, new BBQ grill, cable TV...
When assigning a priority, Ask yourself “What would happen if i don’t pay_________”
Always pay the expenses first that have the highest priority
Ex: Never pay for a vacation before you pay your electricity bill
Step 4. Make a plan for how to budget all of your income
Now that we have made a list of all expenses, and we have determined which are the most important by assigning a Priority to each one, now it is time to begin deciding what you will pay by placing expenses on your budget. Begin placing items on your budget in this order:
1. All Priority 1 items
You have determined that your Priority 1 expenses are the most important. Therefore, even if you do not have enough to pay everything, you are guaranteed to pay the things that are most important such as food, rent, utilities...
If your income does not allow all Priority 1 items, then there should not be any Priority 2 or Priority 3 items budgeted.
2. All Priority 2 items, or as many as possible until the money runs out.
If your income is greater than all of your Priority 1 expenses, you may begin placing Priority 2 expenses on your budget.
Placing a lower priority item on your budget before all Priority 1 expenses are budget says that the lower priority item is more important than a higher priority item. Ex: making a plan to pay for a haircut before making a plan to pay your rent says that your haircut is more important than the rent.
If the budget allows all Priority 1 and Priority 2 items to be paid, move to step 3.
3. As many priority 3 items as possible until the money runs out
Priority 3 items should be budgeted only after all Priority 1 & Priority 2 items are budgeted.
Never budget or pay a lower priority item until all higher priority items are budgeted
By budgeting one item and not budgeting for another, you are saying that the budgeted item is more important than the non-budgeted item.
You are finished when you run out of money, or when Income equals Budgeted Expenses.
If you still have money left after placing all items on you budget, then add more items to you budget, EX: extra savings, debt payoff...
Step 5: Just do it
The most critical, and most difficult step in the budgeting process is making and keeping a commitment to stick to it. This commitment requires sacrifice, you will have to deny yourself some of the things that you want in order to meet your goals. Accountability, it is easier to stick to your plan when you have someone that you have to explain your actions to.
Make a decision to be all-in, 100% committed.
Don’t spend any money outside of the budget
Like any other plan, a budget is useless if it is not followed
What good is a blueprint for a house if the builders do whatever they want without following the plan?
Work together with your spouse,
make budgeting decisions together according to what is best for the family, not what is best for an individual
Agree to stick to the plan,
Do not spend any money outside of the budget
Work together with your spouse and make adjustments if necessary
Don’t forget the reason for your sacrifice
It can be difficult to make sacrifices, difficult to tell yourself no, if you don’t have a clear vision of why you are sacrificing.
Accountability
Review the plan and reality of spending with your spouse or accountability partner
Agree to agree on any spending outside of the budget, make necessary adjustments to the budget before spending outside of the budget
