Budget, Money Management

10 Things To Do Before Creating Your Next Budget

Before you create your next budget or monthly spending plan –

1.  Track your spending for one month.

Use a spreadsheet, pen and paper, or online software, and track your spending for one month.  Track all payments – including those made by check, debit card, cash, (and credit card, if you choose to use one).  Remember to also include any payments that are automatically withdrawn from your checking / savings accounts.

2.  Create a detailed list of non-monthly bills / expenses.

Remember, for a budget to really work, you need to plan for non-monthly (irregular) bills and expenses.  For instance, you may need to pay annual life insurance premiums, twice-yearly automobile insurance premiums, and property taxes.  These bills do not arrive in your mailbox each month, but they still need to be included in your budgeting plans.  Click here for several options for how to deal with annual / irregular billing cycles.

3.  Open a free checking account with free online bill pay.

I could not manage my finances without a free checking account and free online bill pay.  Instead of writing several checks a month, I can go online, schedule payments, and I can finish paying bills in a matter of minutes.  It helps to bank with an institution that integrates with your budgeting software of choice, or one that allows you to download transactions in several different file formats.

4.  Open a savings account.

I use an online savings account – one that allows me to quickly transfer money, via it’s transfer system, to and from my online checking account.  You need an account where you can earn interest, while temporarily saving money for non-monthly bills / annual expenses.  I happen to have three accounts – a checking account at a local bank for day-to-day transactions, the Electric Orange account for online bill pay, and the online savings account for stashing cash until annual bills are due.

5.  Consider a cash-management system that will work for you.

I am comfortable carrying cash, but some may not be.  Find a cash-management system that you like and use it in connection with your budget.  My wife and I us the envelope system. Here’s a video I made discussing the envelope system –

You may choose to use a debit card, or even write checks, instead of using cash, but be sure you have some sort of system set up that helps you account for how much cash you need and spend.  Learning to properly handle cash, without wasting it, is one of the first steps in the life of a maturing home-finance manager.  Stop using the excuse that you “spend more with cash”.  If you can learn to be responsible with the $20 in your wallet, you can learn to be responsible with the $200,000 in your retirement account!

6.  Establish a budget-creation routine.

Determine when you will create your monthly budget.  Determine when you will discuss the monthly / weekly budget with your spouse.  Be specific and write the date / time on your calendar.  Instead of paying bills “whenever you have the chance”, build some time into every week for handling personal-finance related chores.

7.  Balance your checkbook / reconcile savings account.

It almost goes without saying, but before you can create a budget, you need to know how much money you have on hand.  Also, consider taking a look at any other accounts you might have – retirement, education savings, etc. – just to make a note of current balances.

8.  Determine your next financial step / goal / plan.

If you are trying to build an emergency fund, you need to have an emergency fund category in your budget.  If you are trying to get out of debt, you need a debt reduction category in your budget.  If you are trying to fund your Roth IRA, you need a Roth IRA category in your budget.  You get the picture.  Also, remember, after you get out of debt, you can then remove that category from your budget, and replace it with some other category.  The point is – Incorporate your current goal within the budget.

9.  Prepare yourself to succeed (and fail).

If you have never lived on a budget, prepare to be amazed by how in control you will feel, once you start using one.  Also, be prepared to fail, and feel frustrated, once your “perfectly” detailed plans fall completely apart.  The truth is, none of us can tell the future, but we can make some pretty decent predictions, based on past expenses.  For some, budgeting is easy, and becomes easier.  For others, budgeting can be a struggle, and it takes time to find the groove.  Be patient and enjoy the process!

10.  Understand how to budget with irregular income.

For most people, even those with regular monthly income, it’s a good idea to learn how to budget with irregular income.  For instance, most will need to know what to do with year-end bonus or a tax rebate check.  For many, especially those who work on commission, it’s critical to learn how to budget when on an irregular income.  Click here to read an in-depth article about how to create a budget when you have an irregular income.

I have used the above when creating my own budget.  My wife and I have been living on a budget for more than four years.  I will remind you, I am not a financial planner, and the above simply outlines what works for us.  Before making any financial decisions, consider consulting a qualified financial adviser or planner.

13 thoughts on “10 Things To Do Before Creating Your Next Budget

  1. Hi

    I think the point about being prepared to fail is very important. If this is new to you then you are likely to fail sometimes. The important thing is not to give up.

  2. I also agree that being prepared to succeed (and fail) is important. Otherwise, you’ll go crazy.

    That said, I didn’t track our spending for a month before setting up our budget. Our expenses are simply so unpredictable at times, I decided it was better to simply estimate and refine as I go.

    Our first month, we actually did pretty well. I guess part of me was cataloging expenses for awhile before this. Also, since we’re on a very lean budget, it’s pretty easy to list our overall spending. (Of course, I did allow $25/wk for “misc” expenses.)

  3. I enjoyed your link to the envelopes system tutorial and I have a question. I have used the envelope system on and off for the last couple of years with varying degrees of success. Your system is just a bit different than how I have typically done it and I think the tweaks will make a difference for me.

    However. One thing that continually frustrates me about this system is making purchased at one place out of multiple envelopes. Let’s say I go to Walmart and buy some food (groceries envelope), some tshirts for the kids (clothing envelope), and some toiletries (personal care envelope). In the past I’ve tried to keep separate tallies going and pull cash from each category, but then sorting the change back is a pain.

    What do you think about this?

  4. @Keri I have a much more simplified list of budget categories… One simply labeled “groceries” – which would be for everything you listed, except maybe “clothing”… In that case, I would just make the payment from the “groceries” envelope, and then transfer the amount that was for “clothing” from “clothing” to “groceries”… perhaps w/ a little note to remind myself?

  5. I’d argue that you don’t have to track your spending for a month- you can just look back at your bank statements for the past month or two. The only problem with this is if you use a lot of cash- obviously the bank statement won’t tell you where it went!

    And I’d add that the most important tool to actually keeping your budget is putting a piece of paper and pen in your bag/wallet, so that you can keep track of that pesky cash…

  6. In that case, I would just make the payment from the “groceries” envelope, and then transfer the amount that was for “clothing” from “clothing” to “groceries”…
    tahnsk for inf.

  7. I agree with the comment about about reviewing your various insurances from time to time. By switching health, car, and/or home policies – you can save significant dollars.

  8. Yes, the most important thing is to just get started. Making the budget will give you a big sense of accomplishment and then you can take a look at your long-term financial goals and start seeing how you can work towards them.

  9. Yes, it’s extremely important to have a safety net in case the unimaginable occurs…you lose your job or get a pay cut. I like to keep at least 6 months worth of cash to cover expenses in my savings account, in case this event should occur. If you have to dip into your retirement account prior to reaching the age of 59 1/2, Uncle Sam can be quite unforgiving with that 10% IRS penalty.

  10. If you haven’t built a budget yet, these are ten great steps to creating one. One of the most important things missing from personal finance programs today is the ability to create a budget and see where it’s going to take you. I agree that step 9 is probably one of the most important–because it’s just SO easy to give up!

  11. I’ll second the ING Direct accounts you mention. They also help with budgeting because you can set up segmented savings accounts. Our account has about 15 segmented savings accounts that i can even name on the site. Perfect for saving up for vacations, insurance, large purchases. Me, my wife and the kids each have our own little accounts for our discretionary spending as well.

  12. hi NCN! I love these tips. Even though we have been debt free for a while now, I still have trouble with sticking to a budget and find we are saving less than we should. Gotta revisit the whole budget with your tips in mind this time. Thanks!

  13. Thanks so much for this video! 🙂 I really appreciated it! I’ve been thinking about using the envelope system for a while now, but have never really seen it “in action.” This has motivated me to give it a try! 🙂 Thanks again and God bless! 🙂

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