Budgeting 101

I believe that too many people think that a budget is a control item and therefore they avoid it. If done properly, budgeting is a plan and should be liberating. Sure, it can expose some ugly spending, but it honestly allows for you to spend ugly, too, if that’s important to you.


Here is my recommended progression for building a successful budget:


  1. Start blank. Whether you use a whiteboard, a spreadsheet, or a spiral-bound notebook, start anew.

  2. Write down all of the things you currently buy. You don’t have to be so detailed as to write down “milk, toilet paper, and toothpaste” when “groceries” will suffice. But think hard about all of the spending you do, regularly and irregularly. Don’t worry about the costs for those items yet. Just write them down. Include things like insurance and taxes.

  3. Write down all of the things you want to buy. Add to the list all of the things you want that you’re not currently buying. You can add some big-picture stuff here, like retirement, weddings, or lake homes. Don’t be afraid to dream big.

  4. Copy your list into a new column, in order from the most important item to the least. If you’re being honest in this process, then you will realize that some items are subjective (up to you) and some are not. For example, most everybody should put food at the top of the list. Other basic needs like shelter, transportation, and clothing should also appear near the top. These are not subjective. But eventually you will get far enough down the list that you have to subjectively decide which is more important, playing golf or getting a manicure.

  5. Write down the estimated cost for each item. Please do not go look up your last 12 electric bills and provide the average here. Just guess, and err on the side of caution, which means guess higher than what it really costs. For recurring expenses (mortgage, utilities), use the monthly cost estimate. For your big items (vacation, wedding, lake house), use the whole cost of the item.

  6. Next to the cost for each item, list a running total for all items. It should look something like this:

  7. Food: $500 / $500

  8. Rent: $1000 / $1500

  9. Electricity: $300 / $1800

  10. Phone: $120 / $1920

  11. Vacation: $5000 / $6920

  12. Write down your projected income for the month. Include yourself and your spouse. Include earned income (from work) and passive income (from investments, pensions).

  13. Draw a line above the item where the running total exceeds your projected income. Let’s assume my projected income for the month is $3000. As I look down my list, I exceed $3000 when I get to “Vacation.” I should draw a line above “Vacation.”

  14. Each month, spend your money on everything above the line. In my example, I would pay for all of my necessities and have an extra $1080 to put toward my vacation. If my list doesn’t change and my income doesn’t change, then I should have enough to pay for my vacation in about seven months. Once the vacation is over, I can scratch it from the list and start putting my money toward something else.

  15. Repeat the process each month. This is perhaps the most simple step and also the most overlooked. Your budget should not remain the same every month. Prices change. Incomes change. Desires change. Once you have taken a vacation, it may carry the same priority that it did before. Your list should change as your life changes.


The real key to this process is that you get to designate what is important. Now certainly if you are struggling to keep the line below your basic life needs, that is a different issue. But most Americans are simply just too lazy to put in the time it takes to execute that 10-step process on a regular basis. I encourage you to give it a try.


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