Everyone has their own process, when it comes to budgeting. The most successful process will be one that is customized for you and focused on achieving your financial goals. Here is the process that got me out of debt and on to building a strong financial foundation:

Step 1 – Create Your Financial Picture

This is a list of your bills & expenses, and consistent income you can rely on. You can get detailed instructions on this step of the budgeting process from my blog post “Creating Your Financial Picture”.

Your financial picture is critical, because it allows you to easily see if your expected income is less than your expenses, and if it is, you know how much of a shortfall you’re dealing with. I know this is stressful, but it’s important because now you can focus on where you really stand and what to do about it. Can you cut expenses? If you can, be specific, write them down and do the math to see how close you can come to matching your income to your expenses. If you’ve cut to the bone and are still coming up short, you’re going to need to find more income.

But before you start job hunting, don’t forget the second step in budgeting – this is the one that often gets overlooked, even though this is the actual act of budgeting.

Step 2 – Budget The Money You Have TODAY

How much money is in your account today? You can and should make a plan for money you know is on its way, but you can only budget money you already have – and you need to do this first, because it will change how you plan to use the money that’s coming.

So find out how much money is in your account today and split it into various categories, beginning with your four walls – food, clothing, shelter and transportation. This is going to be calming, because it means you’re not starting from zero. You are budgeting the money you have today. If it turns out you have enough in your account to buy groceries for the next two weeks, you can use new money for the next highest priority. But you won’t have a sense of that, unless you can see what you’re working with.

If you’re using cash, get some mailing envelopes and split your cash between them for whatever you need most. If you’re using a debit or credit card, you can use a pen and paper, excel spreadsheet or YNAB as a digital envelope system to split your money into various categories.

You can get a 34-day free trial of YNAB, which is truly free. You don’t have to provide any credit card information, unless you decide to subscribe. The free trial requires nothing more than your name and email address. If you decide to do the free trial, please use the link above! If you subscribe, you’ll get a free month and I’ll get a free month!

How do you “budget” or split up the money? Use your financial picture from step 1 to prioritize your bills & expenses.

Step 3 – Create a Spending Plan

Once you’ve budgeted the money that’s in your account today, you can create a spending plan. Check out my 10-day budget challenge for step by step instructions on how to create your spending plan. If you’ve been laid off and are not yet getting unemployment or any other regular income, you’ll need to create a priority list, instead of a spending plan, because you don’t know how much money you’ll get or when, so the best you can do is have a priority list ready. This way, anytime new money hits your account, no matter how much it is, you can look at your priority list and decide what’s most important. Then, budget that money accordingly.

Step 4 – Monitoring Your Budget

The best planning in the world doesn’t work if you don’t follow the plan. In order to ensure you’re following the plan, you must look before you spend.

You’ve budgeted all your money into various categories, to make sure your necessities are covered. But do you remember how much is in each category? Of course not! If you could keep it all straight in your head, you wouldn’t need a written plan! So before you go shopping, think about what you’re getting ready to buy – and check to make sure it’s in your budget!

If you don’t do this, you’re skipping step 4 and going right to step 5, which is tracking. You have to track your spending, to ensure you’re not spending more than what’s in your bank account, but tracking is after the fact. It’s necessary, so you know what’s left, but what happens if you find out you don’t have enough left to buy food?

Tracking will tell you that there’s nothing left to spend, but it won’t put the money back in your account. If you find out you have nothing left, all you can do is not spend…and go hungry.

Monitoring your budget before each purchase will tell you whether you can spend money in one category, without devastating another. It gives you the power to decide, ahead of time, whether the purchase you’re considering is the right choice for you.

Step 5 – Track Your Spending

Tracking is very important, because it allows you to keep your budget up to date. Every time you spend, it reduces the amount of money you have available in any given category. You need this information, so you can effectively monitor, when it’s time to make your next purchase!

Tracking also helps you create future spending plans or revise your priority list. If you still have plenty of money in your groceries category and new income hits your account, you can budget that money to another category further down on your priority list, because groceries are already covered! But if you’re not tracking your spending, you won’t have a clue what you’ve got left to work with – and you could easily go negative in your account, triggering those nasty overdraft charges.

Follow these steps and you’ll have the knowledge you need to make intentional and informed decisions about your money.

Questions? Comments? Feedback? Send me an email: bobbi@centsablechat.com. I’d love to hear your thoughts!