Build Your Financial Road Map: A 7-Step Plan to Create an Effective Budget

balancing a budget
Ken Teegardin under Creative Commons

What if I told you that the key to reaching your financial goals and living your dream lifestyle is to use a budget?

I know what you’re thinking: You probably associate budgets with your friend who lost his job and never gets to do anything fun anymore. But budgets aren’t just for when times get tough.

Using a budget in your everyday life can help you attain your goals and minimize your stress. It may not be a flashy tactic or a particularly sexy strategy, but a budget is a tool for lifestyle design.

Here’s a step-by-step guide for putting together a budget that helps you use the money you have toward reading your goals and creating the lifestyle you want.

1. Use Tools to Make Budgeting Easier

I can already hear your first objection, but don’t worry, you don’t have to save all of your receipts and do a bunch of math by hand. It’s nearly 2015; we have apps for that. Some good options are Mint, Moneywiz, HomeBudget with Sync and Learnvest.

Of course, you can still manage your finances by hand or use a spreadsheet on your computer if you prefer, but if you want to make it as easy and as accurate as possible, use technology to do some of the work for you. Most large banks and many small ones will track your spending and can generate reports to show you how much you spend in a given category in a given month. I’ll show you how to make the most of these programs later, but for now let’s focus on the big picture.

2. Create an Income and Expense Report

First, figure out how much money you have coming in. This is easy if you have a full-time, salaried job. If you are paid by commission, work hourly or have some other kind of irregular income (like freelancing), use an average of the last several months to get a rough idea. Remember to include other sources of income like a side hustle and rental income in this total.

Next, start deducting your fixed expenses, like your mortgage or rent, car payment and insurance costs. Some of these expenses will be variable: When I lived in Spokane, WA and the January temperatures were below zero, my electricity bills were much higher in the winter. Now that I live in southern Georgia, my summer bills are higher, thanks to average highs in the 90s. Make sure you take these kinds of considerations into account. While your grocery bill isn’t the same every month, you can probably estimate it within $20 or so. Find a number that works for your family and adjust as necessary.

Once you’ve covered the necessities, you might wonder where the rest of your money is going. Figure out what other expenses you’ve missed, such as debt repayment, dining out, shopping, retirement planning, cable/Internet service, etc. If you’ve used an app, your expenses should already be organized into categories, but otherwise you’ll need to check your credit card statements, your online bank account and your checkbook to make sure you’ve hit all your categories. For a great list of common bills (and strategies to lower them), check out this post on Lifehacker.

3. Figure Out What Your Goals Cost

This is the fun part: Imagine your dream lifestyle. Maybe you want to go out every Friday night, or retire when you’re 50 (or younger). Perhaps you want to pay off your student loans or buy a house.

Whatever you want out of life, write it down and figure out how much it will cost. Tim Ferriss of The 4-Hour Work Week calls this “dreamlining.”

4. Prioritize Your Expenses and Goals

Next, get your priorities in order — literally. Write them down in order from most to least important to get an idea of where you want your money to go.

You might not get your priorities right the first time, and that’s ok. It’s challenging to choose one option over another, and if the first list doesn’t work well, you can always rework it. I’m not suggesting you derail your goals, only that you make sure you aren’t placing your priorities above those of your family or trying to enforce total austerity. Work to find a balance between “fun” and “responsible” spending.

5. Compare Your Priorities and Goals to Your Spending Habits

Compare your dreamline and your priority list to your expense report. Do they match up well, or are there huge discrepancies?

Hopefully you don’t have any surprises — “What do you mean I’ve been spending $150 a month on lattes when my number-one goal is to pay off my student loans?” If you see any areas where your spending is out of line with your goals, now’s the time to fix it by outlining a new budget that directs more of your income to your top priorities.

For example, if you want to retire early but aren’t maxing out your Roth IRA or 401(k), consider where that money is going instead. However, if you like buying a new car every few years and plan on working until you are 70, your spending and saving habits should reflect that choice.

My family likes to travel, so I built a vacation savings account into my budget. Maybe you’re a big football fan and you want season tickets. By saving all year long, you can breathe easy when you pay cash for them. If you’d like to pay off a ton of debt, prioritize attacking the debt over other expenditures.

Remember, it isn’t about putting money where a supposed expert tells you to. When your behavior doesn’t reflect your goals and ideals, it creates stress. Psychologists call this cognitive dissonance and it can wreck your happiness. If you live on a budget designed by someone else, you will be unhappy, but if you align your spending and saving to your own goals, then you will live your ideal life (at least financially).

6. Automate Your Budget

Automating the budgeting process helps you focus on your priorities by sending the money where it needs to go before you have the chance to blow it on an impulse. Here’s a system you could try, from personal finance author Ramit Sethi.

To help you keep track of everything, link your bank accounts to a budgeting app like Mint (most of the top budget apps function similarly). Create budget categories with spending limits, and tell the app how to classify different transactions. Mint will show you how much you’ve spent in a given category this month and alert you when you approach or exceed a limit you’ve defined.

Automating your payments isn’t a perfect solution, but it can help take some of the time and effort out of managing your budget.

7. Give Your Budget a Critical Review

Check over your plan for your spending and saving. Does it make sense? Did you cover all your bases?

What if you follow all of these steps and find there isn’t enough money to cover all your priorities and goals? You’ve got two options at this point: Earn more or spend less.

While frugality can help you make the most of the money you already have, the bigger potential is in adding to your income. Check out the many ways to earn more money covered on The Penny Hoarder for inspiration.

Think of your income as a vehicle and your budget as a map. People who earn a lot, like NFL players, all have really fast vehicles — but since studies have shown that 78% of them file for bankruptcy within five years of retirement, it doesn’t look like they have much of a map.

Your goal is to get to your destination by the shortest possible route, and that’s where your map comes in. If you switch to a faster car (by getting a raise or starting a side business), you’ll be able to take a more scenic route.

Keep an eye on your plan as your goals and life change. Earning a raise, losing a job, getting married, having kids, starting a business — each of these life changes requires you to review and recalibrate your budget to stay on track to meet your goals and live your life.

Using a budget may not be a new or fancy tactic, but it’s a smart one. Try looking at yours as a tool to help you design the life you want, and see if it helps “being on a budget” feel a little more appealing.

Your Turn: How do you use a budget to help you meet your financial goals?

Kevin Mack is a freelance writer and blogger from Jacksonville, FL.