How to make a budget

My wife and I took our one-year-old twins and her parents to a resort in Mexico for Thanksgiving in 2014. With the twins, I think Katie spent the better part of 2-days picking out everything to bring and packing the suitcases. Enough diapers, wipes, snacks, toys, sunblock, hats, the kitchen sink. It was a ton of thankless work.

You have at some point in your life spent at least one night away from your home, right? A friends house, at a hotel because your heater broke or camping in a tent at a state park.

Make a quick mental list of what you packed for your trip:

  • A toothbrush?
  • Another pair of shoes?
  • Some pajamas?
  • Guide book?
  • Snacks?
  • Maps?
  • Umbrella?
  • Sunblock?
  • Flip flops?
  • Gloves?
  • Toys for the kids?

Depending on the length of your trip, you either spent 15 minutes packing or two hours.

But how long have you spent packing for the financial journey you’re on for the rest of your life?

Where your money travels

What is your family income right now?

Do you earn $35,000 a year?

Do you earn $50,000 a year?

Do you earn $100,000 a year?

On average $1,200 per person is spent on vacations each year.

If you spent 2 hours planning where you’re going to spend $1,200 – how much time last year did you spend planning where you were going to spend your income of $35,000, $50,000, $100,000?


Don’t feel bad – I totally get it. Probably your spending plan is more like mine used to be:

My last paycheck was $800, I get paid four times a month, so that’s $3,200.  That sounds to me like I can afford a $1,000 a month apartment. Where do I sign the lease?

Well the bank told me I could buy a house for this much, so I guess that’s how much house I should spend on a house. Wow, I didn’t know I could afford such a beautiful big house!

I have $600 in my checking account, so I’ll charge $200 on my credit card for groceries at Publix, and then go to Guitar Center and buy $300 of new guitar gear and charge that too.

Sound familiar? That was me.

These aren’t plans; they are best guesses that lead us to being broke, in debt, and living paycheck to paycheck.

The percent of people with a detailed household spending plan.

That means that two out of three of people are spending more time planning their $1,200 vacation than where their $50,000 income is traveling. That’s a recipe for a lousy trip.

Why spending plans are critical to your financial future

Good management of your family’s finances – and the avoidance of financial difficulties – involves creating a family spending plan.

Creating your first spending plan will be the best thing you ever do to get out of debt and start building wealth.

You already know planning a family vacation takes time. Creating your first spending plan is going to take a little time too. But it takes less time the more you do it.

For many people, it’s a bit of a rude awakening putting all of their expenses down on paper and looking at the big picture for what may be the first time in their lives.

Gain total control of your money

A spending plan helps get you off the financial roller coaster. It will help you get out of debt, save more money and break the paycheck to paycheck cycle. It will allow you to know quickly if that new sweater or new car will negatively affect your finances now and later on.

5 simple steps to having a spending plan

I’m all about simplicity and making sure you succeed. So I created this simple 5 step process to help you create a spending plan. You can do all the steps at once, or you can do one a day, so you don’t feel overwhelmed.

Overwhelm and procrastination are the killers of new habits. Stay out of overwhelm by taking the steps one at a time. Avoid procrastination by setting a time each day that you will absolutely, without excuse, come hell or high water, get each step done.

  1. Print the map
  2. Plan your sightseeing
  3. Pack your bags
  4. Check your compass
  5. Let’s get going

Simple step #1 – Print the map (1 minute)

Print this stuff. That was easy!

Simple step #2 – Plan your site seeing (15 minutes)

When you visit someplace for the first time, some site seeing is always in order. If you visit New York City wouldn’t you go see the Statue of Liberty or a Broadway show? You would check the schedules and prices, and then write down a schedule of what you were doing and when.

Where do you want to take your money?

Before creating a spending plan, write down what your goals, priorities, and dreams are.

And when I say for you to write it down, what I mean for you to do is write it down. Stop right now. Go get a pen. Take out Page 1 of the planning documents.

Just a quick interjection why I ask people to do this and why it’s important.

In 1979, interviewers asked new graduates from Harvard’s MBA Program and found that

  • 84% had no specific goals at all
  • 13% had goals, but they were not written down
  • 3% had clear, written goals and plans to accomplish them

In 1989, the interviewers again interviewed the graduates of that class. What do you think the results were?

The 13% of the class who had goals were earning, on average, twice as much as the 84 percent who had no goals at all.

And now for the big reveal – the three percent who had clear, written goals were earning, on average, ten times as much as the other 97 percent put together.

Stew on that for a moment – the 3% that had written goals, earned on average ten times as much as the 97 percent put together.

So I don’t ask you to write out your priorities and your dreams without a good reason for doing so. The reason is that when you do you are a bajillion times more likely to accomplish them.

If you don’t have time to write down your goals right now, where are you going to find the time to accomplish them?

Example goals

If you need help deciding on your priorities or your goals here are some examples:

  • I want to have less stress in my life by paying off all my credit cards and car payments in 24 months
  • I want to relax and eat lots of pasta by taking a 2-week vacation in Italy within the next five years
  • I want my kids to succeed in life by paying for them to attend a top-notch college without having any student loans
  • I want to volunteer to help others when I retire at age 55

Stop reading, press pause if you are listening. Go write something down.

[Pretend the Jeopardy song is playing in the background]

Ok, welcome back. If you haven’t written anything down yet, stop and go do it. I’m not kidding, go do it now, I’ll wait.

This list you created doesn’t have to be cast in concrete. It’s just a starting point. I hope you wrote it down, and if you did go put it on your bathroom mirror before bedtime to inspire you every day.

This list will give you daily direction and help you make financial decisions based on your priorities.

4 important questions to ask about your trip

Although I’ve had a spending plan for a long time, there was a period where I got kind of lazy and didn’t keep up with it. That can happen to you when you get out debt (which you will), spending less than you earn (which you will) and everything is going great.

Who cares if we go to a fancy restaurant this month, because every month we’re spending less than we make?

That’s laziness folks, and it can get you into trouble. I was robbing myself of my money.

I needed to change my spending habits.

Now I know some of you don’t like exercises because it makes you feel like you’re back in school, but this one is easy and empowering. When you finish, you will be sitting there wondering ‘wow, I do need to get on this’.

That’s why I am going to share my results first, and this is simple. We’re going to answer four simple questions. I’ll go first and give you my answers.

Question #1: What are the reasons I DON’T want to work on my spending plan?

  • It’s time-consuming
  • It never seems to work
  • The software gives me a headache
  • I’d rather be doing something else
  • I’d rather not see what we are spending money on
  • It’s depressing knowing how much we spend

Question #2: What pleasure do I get from NOT following through with my spending plan?

  • Ignorance is bliss
  • I can spend an extra 20 minutes per week doing something else, like relaxing
  • It’s just one less thing on my todo list each week.
  • I can spend more, and it doesn’t matter

Question #3: What will it cost you if you DON’T change?

  • We are more likely to run out of money
  • I will have to get a corporate job
  • I will have to work 70 hours a week again to maintain our lifestyle
  • I will have to commute
  • I will not be the boss
  • Stress will increase if we don’t have a plan
  • I might not be able to get a job or create a new successful business

Question #4: What will you gain by taking ACTION right now?

  • I’ll gain the feeling of knowing I am the master of my finances.
  • I’ll gain knowledge that can be shared
  • I’ll gain the feeling of knowing I am not a hypocrite when speaking to others about budgets.
  • I’ll gain the feeling of being more secure about our retirement and not running out of money
  • I’ll gain the feeling of less worry
  • I’ll gain the feeling of not knowing what our financial situation is
  • I’ll gain the feeling of control over our finances.

So there you have it; that was me. Does anything I just said sound familiar to you? I bet something in that list does. Isn’t it nice to know your not alone in this journey?

Now I want you grab some paper and a pen. In your printouts, I’ve already got the questions listed out for you. Spend 5 minutes and fill in your answers. Stop reading and listening right now. Go do it and give yourself some momentum. Write down for yourself what it’s going to mean to you and your family if you don’t change, if you don’t take action. Ready, set, go!

Ok welcome back, if you didn’t do the exercise, please take 5 minutes to do it. Some of you are like I used to be and are saying ‘oh, this is stupid, I’ll just think about the answers’, or ‘oh I’ll do this later on tonight’.

Please don’t miss this – you build momentum and change by taking immediate action. If you’re not in your car and you have 5 minutes, take the 5 minutes and write it down. Writing is powerful. That 7-pound lump between your ears is going to work its magic when you record your thoughts on paper. Do not underestimate the power of you writing down the answers to these questions – it works.

Step 3 – Pack your bags (30–60 minutes)

If you have never written down your income and tracked your expenses, your money is currently taking you on a trip. But you don’t realize where you’re headed. It’s most likely to debt city, broke town, divorce land, the state of worry, stressville, somewhere in between, or all of the above.

Kick your money out of the driver’s seat, it’s time for you to take control of the wheel.

I call this packing your bags because you’re going to be digging through your drawers and your computer for all the papers and receipts you’ll need to figure out what you’re spending money. It’s like figuring out what you’re going to pack for your trip.

We need to do two things next:

  1. write down all of our sources of income
  2. start tracking all of your expenses

1. Tracking Income

Take the Sources of Income form you printed earlier, and start filling it in. When you’re finished writing down all of your income sources, total it up for the month and write that at the bottom. This number is your starting number for your spending plan.

  • Find your most recent paystubs

2. Tracking Expenses

The next part is a real eye-opener, to say the least. Take the spending forms you printed out and fill out where your money is currently going. You can find the information by:

  • Printing your last three months of bank statements and credit card statements
  • Finding your most recent utility, insurance, mortgage, car payment, and any other monthly bills you get in the mail or electronically
  • Finding any receipts you might have kept

Tip: Make a checkbox if the item is mandatory or not. Gas for your car is mandatory. Magazine subscriptions are not. This indicator helps you find flexible expenses where you might cut back on later.

Fill out your forms and then come back.

Once you have all your expenses filled out based on your bills and receipts, go look at the items that don’t have any expenses yet. Figure out if it applies to you and what amount should go in there.

For example, your auto insurance may only get paid once a year and you don’t have your last bill handy. You need to account for that expense.

If you’re single you can skip to the next step.

If you’re a couple, it’s time to herd the cats. Get the family together. It’s a family vacation. You can’t leave your husband/wife on the doorstep and wave goodbye as you pull out of the driveway.

Tips if you are married

Pick a time on the evening or on a weekend to dedicate time to doing this. Put it on the calendar and commit to doing it. Make sure the kids aren’t around when you’re doing this, you don’t need the interruption. Turn off your phones and the tv. Eat a meal or a snack beforehand, so you don’t get hangry. Put on some of your favorite music that you like to sing or dance to – it helps lighten the mood. Get whatever your favorite beverage is if you want. If it’s beer, that means a beer, not a six pack. Are you with me?

Have one person be responsible for reading the numbers and the other person filling out the sheets. Begin at the top of the stack of bills and receipts and work your way to the bottom, filling in the spending form for each one.

Filling out the spending form is a time for documentation only. You’re writing. You’re filling in the blanks. Treat it like filling out a job application. You’re looking for the information to fill in the form, and you’re writing it down.

You’re not at the point for analysis.

You’re not trying to reduce your spending yet.

You’re not arguing, pointing fingers, rolling your eyes, crying, or yelling at each other.

You’re just making notes on where the money has been going.

Yes your wife spent too much on clothes and getting her nails done.

Yes your husband is blowing too much money on golf.

Shut up about it. Zip it. Keep a lid on it. Close your pie hole. I don’t apologize for being too direct, but it’s the both of you that went on the trip without a plan.

Step #4 – Check your compass

Have you been heading in the right direction?

If you’re married have you been heading in opposite directions?

You are where you are. You might have been going North, and you realize you should have been heading West. Head West then.

Don’t focus on how you got here, who’s fault it is and spending your time on the problem. That’s wasted effort.

We are taking a simple step towards the solution and achieving your goals and priorities.

Focus on the solutions. Focus on what direction you should be going..

Stop wasting time on the problem. Stop pointing fingers.

More than likely you might feel a little dismayed as you start filling in the blanks:

  • Am I/are we really spending $2,500 a year on auto insurance?
  • When did I/we spend $100 on babysitting?
  • $200 a month on eating out for lunch for one person?

I hear you, and I’ve been there. One year I was really busy and working 80 hours a week and had to hire a lawnmower for $35/week. When I became less busy, I had time to do the math – $1,700 a year! That was sickening to me, so I fired him.

Writing down your expenses helps you compare your spending to your priorities.

Tip: If you (or either of you if you’re married) need to – put away the papers until tomorrow when you can come back with fresh eyes and a calm attitude. Just make sure you come back.

Step #5 Let’s get going

Cars packed – check. Kids are packed – check. Dogs packed – check. The gas tank is full – check.

Let’s get this show on the road!

Spending vs. priorities

Now that you know where you are spending your income, how does it compare to your priorities? Are they completely out of whack?

Did you ever realize how much buying new clothes all the time was sapping your other goals? You might rethink that trip to the mall this weekend if it’s going to impact your vacation, but we’re not there quite yet.

I said this was going to be an eye opener for you – was it? You might be feeling one or more of the following at this point:

  • Embarrassment
  • Depression
  • Anxiety
  • Sadness
  • Hopelessness
  • Pain
  • Sickness
  • Overwhelm
  • Stress

You might be downright angry at your spouse if you’re married. What I need you to do, is pretend you’re reading a math textbook, and it’s boring.

It’s just data. Take a deep breath. It’s just data.

Data that you are going to use to align your spending with your priorities. Yelling isn’t the solution. Throwing plates isn’t the solution. Going to buy ice cream isn’t the solution. Opening a bottle of wine isn’t the solution.

The solution for now is to look over your expenses.

John & Mary’s spending plan

John and Mary are an average American family earning the average income, spending the average amounts of money in various categories.

The trouble is the average family is spending more than they earn every month and getting deeper and deeper into debt. But before they wrote this information down, they had no idea where their money was going. They couldn’t figure out how they were getting deeper into debt and had little or zero savings.

2/3 of Americans have no clue about where they spend their money.

Congratulations, because now you do. My hats off to you for being one of the few people that take the time to do this and write down on paper and see where your money is going.

John & Mary’s improved spending plan

Ok, John and Mary are overspending, so they need to take some time together and come to some agreements on where they can make some improvements to change their situation, and ultimately improve their future.

You do this by reviewing what your priorities and goals and comparing them to where your money is going.

First you have to determine as a family where you can carve out some extra money.

If you spend more than you earn each month, you are going to have to carve out more in some categories to get more excess money to use towards your goals.

What if you already have extra left over each month but want to save more of what you earn? Carve out more in some of the categories to give you more cash to work with.

Simple right?

Spend less to have more.

Every person and family have their unique situations, but typically there are a couple areas we can focus on to trim the fat in the spending plan. These are just examples to help you get started.

The first is eating out and groceries. John and Mary spend $319 a month eating out, and $631 a month on groceries. Eating out costs a lot more than buying groceries, and one of the categories that most people have flexibility.

The next category is Entertainment. Your cable bill, Internet, concert tickets, going to the movies, etc. John and Mary spend $207 a month in this category.

To make things interesting John and Mary are going to – gasp! – start wearing the clothes in their closet they haven’t worn in the last 12 months in order to cut their clothing spending. They decided it’s more important for them to wait on updating their wardrobe later on, and take action on their spending in the short term.

In the Improved Spending Plan, they are going to make a few simple changes in the short term so they can get out of debt and get ahead in the long term:

  • Eat out 1/2 as much, saving $159 a month
  • Shop smarter for groceries and cook more, saving $50 a month
  • Not buying new clothes for a while, saving $121 a month

These three adjustments took the original spending plan from going further into debt every month to having an excess of $330 a month.

That’s a swing of -$1,000 per year in new debt to +$3,960 a year surplus.

By having a detailed household spending plan, you are now ahead of 2/3 of Americans. But more importantly, you are now on the path to getting out of debt and building wealth.


Hey, remember when we first started this discussion I had you think about packing for your next vacation? It was all about planning on what you do to get to where you want to go.

Ultimately where you go on this spending trip is financial freedom. It’s freedom to wake up each day and not have to worry about the bills. The debt. The debt collectors. The mortgage. What the economy is doing. What you’re retirement is going to look like.

When you plan your spending, you control all of that. You’re never left wondering because you know exactly where you are going on this money trip, and you have a spending plan to get there.

Your new spending plan

Now that you know your exact income and expenses, its time to start aligning your expenses with your priorities.

Take out the New Spending Plan form. In the Monthly Total section fill out all of your fixed expense items, like your cell phone bill, car payment, insurance, student loans, etc.

Sometimes the perfect is the enemy of the good.

This will take time

Three months is a good time frame to get a more accurate representation of your spending, because it will include seasonal expenses. A year’s worth of data would be the most accurate. Unless you are a pack rat and have 12 months of electric bills in the drawer, it’s not likely you can get that to that level of detail.

Zeroing in on your spending plan

The perfect spending plan has your monthly inflows (your income) equal to the monthly outflows (spending and savings). When you get to this point, you have what is called a zero-based spending plan.

The summary in your monthly spending plan would look like this:

Monthly income: $3,500
Monthly expenses: $3,500

If your total expenses are $3,650 for a month, you’ve just spent $150 you didn’t have. You need to find one or more spending categories to reduce by $150.

If your total expenses are $3,350 for a month, you’ve got an extra $150 left over. You need to tell where to go (savings, debt payoff, investing, extra mortgage payment).

The zero-based spending plan is the map for your journey. Create a revised version every month to stay on course – forever and ever. You will be doing this until the day you die to live a life worth living and keep your cats from eating the cheap cat food.

It’s NEVER perfect

Your spending plan will never, ever be perfect. And if this is your first time creating one it’s going to need some tweaking over the next several months as you start working your plan.

Some expenses like the cost of gas will vary each month. You might spend a little less one month, or the cost of gas may go up. There will be ‘Ooops’ moments where you get a bill that only comes once a year that you forgot.

This situation happened to me a few months ago because I switched to a home insurance company that required me to have my smoke alarms monitored by a burglar and fire alarm company. It was only the second time I had received the bill, and it wasn’t part of my new budget.


Make adjustments and go on. Do the best you can and revise as necessary.

Your goal is to start telling your money where to go instead of wondering where it went.

It becomes fun and a habit

Do you want to know why this is fun? Go re-read the goals you wrote down in Step #2. Those are your goals that you want to achieve.

How much fun is it going to be for you to reach them? If you haven’t already, tape those goals to your bathroom mirror so you can see them every day for motivation.

You should now have a trip planned for all of your income. You’re heading in the right direction. You’ve got you’re sight-seeing planned. You’re on the road to financial freedom in a red convertible with the wind blowing around you.

Just keep driving, following the custom map you created.

Look down and check your speed every once-in-a-while.

You will arrive at your destination.

Question: Have you ever had a spending plan before? Share your answer in the comments below.

How To Get Started Investing

The international bestseller by CERTIFIED FINANCIAL PLANNER Scott Alan Turner. Choose the right accounts & investments so your money grows for you – automatically. No jargon, confusion, or pie in the sky promises. Just a proven plan that works.

How to get started investing free first chapter

Most Popular Posts

You May Also Like

Get the first chapter free!

Just tell me where to send it.