How to Create a Budget: 5 Simple Steps

The thought of creating a budget for your household can be a scary or intimidating. After all, if you have never created a cash flow plan, the toughest part is starting or knowing where to begin.

Why Now?

Why would you need to create a budget? Simple, without a budget, you have no plan for your money. A budget is simply a plan or a framework for telling your money what to do.

Luke 14:28-30, Jesus said “For which of you, intending to build a tower, does not sit down first and count the cost, whether he has enough to finish it (29) lest, after he has laid the foundation, and is not able to finish, all who see it begin to mock him, (30) saying, This man began to build and was not able to finish.” 

In other areas of you life, you probably have plans. Plans for you week (using a calendar or some sort of planning device), planning a vacation, planning a project at work, or perhaps lesson planning if you are a teacher. With a budget, the concept is no different, you are planning your money on paper with a purpose.

Cash flow planning is now more important in our society than ever before. Believe it or not, millionaires, families with a net worth of a million dollars or more, live on budgets. That is how they became millionaires.

Where do you start?

When I meet with clients or teach Financial Peace University at my church, the biggest obstacle in creating a budget is where to start. Most individuals and families don’t know where to start. This fear sometimes results in discouragement and ultimately people say, “forget it,” it is not worth the trouble. Or they feel that their financial situation is hopeless.

My goal s a financial coach is to provide encouragement, and show them where and how to begin. The easiest way to do this is to break down the budgeting process into simple steps. In some cases, it  may take 30-60 days before a reasonable budget can be put together.

7 Essential Components

I believe to get started on the budget process for the first time, it is essential to breakdown your financial picture by gathering data. Here are the seven essential steps or components for creating a budget:

  1. Establish the “why” instead of the “what”: It is essential that you understand why you are creating a budget. If you are doing it because I tell you to in this blog post or your spouse says we need to, then that is not good enough. You must understand the why. Is it because you want to get out of debt? Become wealthy? Be able to save for your kids’ college? What ever the reason is, have a goal.
  2. Income: Write down all of your sources of income at the top of a sheet of paper (or on a computer document). This includes paychecks, small business income, side jobs, alimony, or child support. If your income varies, jot down the average over the last six months.
  3. Expenses: This is usually the biggest stumbling block. How much do you spend? If you are unsure, don’t rush into this process. The best way to find out how much you are spending is by breaking it down into three categories: Monthly fixed expenses (utilities, rent, mortgage, car payments), variable expenses (groceries, entertainment, fuel, miscellaneous), and non monthly (auto insurance, non monthly utilities, expenses that may occur several times a year such as child expenses). Once you have made this list, then began writing down every expense you make every day and write what category it fits into. Checking your bank statements is a good place to start. Spend the next 30 days working on this step before putting together your complete cash flow plan.
  4. Put it all together: You now have your income and expenses, it is time to lay out your budget. Get the yellow pad out and write your income specific for the month, then follow-up by listing all of your expenses for THAT month. The budget must balance meaning income minus expenses equal ZERO. You cannot have a negative number. If this is the case, make sure you take care necessities first (food, clothing, shelter, transportation). You may have to rank the importance of each expense and decide which items don’t make the cut.
  5. Work Together: The monthly cash flow plan should be agreed upon by both spouses,if you are single, consult with a trusted friend who will be honest with you and keep you accountable.

A budget will not be perfect, in fact it isn’t perfect because life happens to us every day. However, it is better to have a plan for the money that flows through our hands. In addition, the resources we manage are not ours, they are GOD’s. We are called upon to manage his stuff well. If you don’t live on a budget, then most likely you are not doing a good job at managing HIS money.

Question: What is preventing you from creating and living on a budget?

photo credit: LordFerguson via photopin cc

I provide one on one financial planning, counseling, and coaching coaching services that will help you develop and implement a plan specific to your unique situation. This may include learning how to create a cash flow plan, save for emergencies and purchases, reduce debt, and build wealth. In addition, I can walk with you through a crisis, such as dealing with harassing debt collectors, bankruptcy, and foreclosure.

Please note: I reserve the right to delete comments that are offensive or off-topic.