Let’s face it–most people don’t like to set a budget.

For many, it represents being told what you can’t do.

If that’s how you feel, my goal here is to try to change your perspective.

A budget doesn’t have to be some restrictive spreadsheet that takes away all of your joy. If you allow it, your budget can simply be a tool to help you strengthen your financial relationship.

It can give you permission to spend on what makes you happy today while still helping you to reach your future goals.

So, in this post I am going to walk you through how you can establish a budget that you can be happy with.

Before We Start

Before we get to the process, there’s a few things I want you to know.

To start, you can choose whatever method you want to keep track of your budget. That can be paper, Microsoft Excel, a gigantic white board, or one of the many available budgeting apps. Go with what feels right to you.

Next, I want you to know that the process I use is structured around zero-based budgeting. That means that every dollar of your income has a job to do. Every dollar will get allocated to either savings, debt, needs, or wants.

Lastly, try not to let any past negative experiences with budgeting hold you back. You may have tried budgeting before and for some reason or another, it didn’t stick. Give yourself a clean slate, and an open mind.

Ok, let’s get into it.

Step 1: Review prior spending

Right out of the gate you want to start on the right foot; a realistic foot. There’s no point in trying to create a budget that’s too restrictive or unrealistic.

It needs to be something you can stick to and refine over time.

To get started, take a look at the last 1-3 months of bank/card statements and see how you’ve previously been spending money.

This will help you to identify patterns in your spending. For example, you may be spending more or less in a particular category than you thought.

If it’s more, you can evaluate and determine if this behavior is something you want to continue, or change.

If it’s less, it’s still worth evaluating.

For example, you may find you are spending more than you thought on eating out, but hardly anything on groceries.

During your evaluation, you may determine you’d prefer to cook more and dine out less.

This is an important step to get you thinking about what you do with your money.

Up next is…

Step 2: Calculate monthly income

Ok, now that we have looked at the past, it’s time to start looking at the present.

Calculate all of your monthly income.

This can be your monthly take home salary (net), part-time job, income from a side gig, rental income, alimony, or any other monthly income source.

Knowing your income is an important aspect of understanding your complete money picture.

List each income source at the top of your budget like:

• Monthly Net Salary: $3000
• Side Gig Income: $200
• Total: $3200

Fairly straight forward, right? The next step is…

Step 3: Calculate essential monthly expenses

Now we are getting into your expenses. Expenses can be non-discretionary, discretionary, fixed, variable, monthly, periodic, or a combination.

For now, we will focus on the monthly expenses that you NEED to pay (non-discretionary). Non-discretionary expense are your essentials like rent/mortgage, certain utilities, food, loan minimum payments, or other similar bills.

These expenses can be fixed or variable. Fixed expenses—like your rent/mortgage—are the same each month. Variable expenses on the other hand can change based on your use; think utilities and groceries.

Notice the focus here is on necessary expenses. Netflix for example is a monthly fixed expense, but let’s be honest, you don’t need it to survive.

Ok, so like we did with your income, list out your necessary monthly expenses like:

• Rent/Mortgage: $1000
• Electric: $30
• Auto Gas: $150
• Auto Insurance: $100
• Groceries: $150
• Cell Phone: $70
• Minimum Loan Payment: $300

This would be a good time for me to mention periodic expenses like auto insurance. If you pay a periodic bill like auto insurance every 6 months, break it down into the monthly figure and reflect that in your budget. Example, if you pay $600 every 6 months, put $100 on your budget. This way you can save that amount each month and have the full amount saved by the time you need to pay it.

Your personal non-discretionary expenses will be based on your life. You may have a different perspective on what you absolutely need; that’s your call. Do what makes sense for your situation.

Next, you’ll want to…

Step 4: Stop, and evaluate

Yes, stop!

So far you have identified patterns in your previous spending, calculated your income, and outlined all of your necessary spending.

Take a moment to check out the numbers.

Using the above fictitious budget, subtract the necessary expenses from income and there’s $1400 left. That’s $1400 to use towards advancing goals, and enjoying life.

This is also known as discretionary income, and it can impact your future decisions depending on how you interpret it.

For example, If the discretionary income is less than what you thought, you might determine you need to increase your income.  

Or the amount could make you realize you have more than you thought to put towards your goals while still spending on what matters to you the most.

The interpretation is up to you, but don’t pass up the opportunity to further understand and redefine your thoughts about your money.

Ok, on to…

Step 5: Include your goals

One mistake people often make with budgeting is waiting to see “what’s left” to save. Most people spend on needs and wants before even thinking about setting aside money for goals.

This is cheating yourself.

Remember, a part of financial well-being is being able to actively pursue your goals. That can be a debt reduction, savings, or investing goal (learn how to set goals here).

So, to make sure you stay on track, bump it up on the priority list. Determine your short-term goals, and include a monthly allocation in your budget.

The allocation will be based on the amount of your disposable income. In the case of our fictional budget from above, there’s a maximum $1400.

Let’s say from taking a look at your goals, you decide to put $400 towards an emergency fund, $200 towards a Roth IRA, and an additional $300 towards your debt.

In updating the example of money going out, it would look like this:

• Rent/Mortgage: $1000
• Electric: $30
• Auto Gas: $150
• Auto Insurance: $100
• Groceries: $150
• Cell Phone: $70
• Loan Payment: $300
• Emergency Fund Savings: $400
• Roth IRA: $200
• Additional Debt Payment: $300

Boom, you have now made space for your goals.

I personally find it easier to list goals along with necessary expenses so I prioritize it. Feel free to list your savings under a separate line. As long as you focus on them right after your essentials, call it whatever you like!

Now, we need to find room for Netflix, so let’s get to that…

Step 6: Determine discretionary expenses

It’s time to add in the expenses you don’t have to pay, but choose to pay. These are your discretionary expenses.

If my math is correct, the above fictional budget has $3200 coming in, and $2700 going out so the balance is $500.

This is what you have to spend on the rest of your non-essential items. This includes TV subscriptions, clothes beyond what you need, morning trips to Dunkin Donuts, happy hour with friends, dining out, and any other spending beyond our needs.

Nothing wrong with wanting these things, after-all we all need to enjoy life. The trick is to find space for this stuff without it sacrificing our financial progress. This is why we allocate money for the non-essentials after we have covered our goals.

Also, keep in mind that you do NOT need to spend all of the $500 on wants. Enjoy today, but always check in with your goals and allocate appropriately.

Updating the fake budget:

• Rent/Mortgage: $1000
• Electric: $30
• Auto Gas: $150
• Auto Insurance: $100
• Groceries: $150
• Cell Phone: $70
• Loan Payment: $300
• Emergency Fund Savings: $400
• Roth IRA: $200
• Additional Debt Payment: $300
• TV Subscription: $10
• Restaurants: $130
• Gym: $10
• Miscellaneous: $50
• Total: $2900

That’s the main grunt work so let’s make it make sense…

Step 7: Subtract and evaluate

Subtract expenses from your income and reflect on the results.

Based on our fake budget, there’s $300 left after covering what we need, goals, and non-essentials.

In your case, you may have either a similar surplus, break-even, or a deficit. So, depending on your result, the interpretation and path depends:

• Surplus: You have extra! Use it towards the areas of your budget that will increase your well-being. This is for YOU to decide, but just keep in mind your current situation and future visions. If you are currently in debt, putting that extra money towards getting out of debt could really benefit you. If you are debt free, investing, and have a fully funded emergency fund, perhaps you use the surplus towards a hobby or vacation. Your personal well-being journey is for you to design, just ensure every dollar has a mission.

• Break-even: This means you make just enough money to cover your current spending. It also means you managed to nail the budget process on the first run! If your budget covers your needs, goals, and wants, you nailed it. Just make sure you have some wiggle room in the form of a miscellaneous category. Things can happen!

• Deficit: If your leftover number is negative then your spending targets are more than your income. This could mean you need additional income, or it might just mean you need to adjust your spending targets. Before you conclude either way, see how far off you are and then review your budget. If you are off big time, double check you aren’t including too many wants, or wants you could live without. Also check your savings goals. You want to enhance your future, but still be in balance today. If your expenses, wants, and goals all seem reasonable, you may need to increase your income.

In all of these cases, it’s important to review, evaluate and adjust as necessary in order to make sure the “coming in” minus the “going out” equals zero. Remember, each dollar needs a mission.

Step 8: Implement, project, and modify as necessary

Alright! Now, it’s time to put your budget into play.

Always keep in mind that this budget is a starting point to work from each month. It’s a baseline for you to adjust as necessary.

I typically do my budget at the end of the current month, in advance of the following month. For example, at the end of April, I will do my budget for May.

This allows me to look ahead, plan, and adjust as necessary. If I know I will need to buy someone a birthday gift next month, I work it into my budget. That could mean allocating less for “dining out” so I have room for the gift without it impacting my financial goals.

Things may come up during the month and when it does, play the trade-off game and adjust in a similar manner.

The better you can become at making good choices, the better off you will be with your money.

Final Thoughts

If you implement these steps, you can come up with a budget that is in alignment with your values and motivations.

This approach to budgeting is less about forced constraints you end up resenting, and more about balanced prioritization.

By that, I mean: your day-to-day finances are covered, goals are worked in, and you can still “live your life”.

If it takes you a few months to get the hang of it, that’s ok! To be honest, it took me three or four months to get in the habit of projecting ahead.

The key is to stay focused, balanced, and consistent.

Good luck and stay on the journey!