Budgeting: The most important thing you can do with your money

The most important thing to do with your money is to give it a plan. A budget. A spending plan. A cash-flow plan. Call it what you will, but having a plan for how you spend money will set you free to actually enjoy it.

Managing Money and Impulses

Everyone who has any kind of income needs a budget. Successful companies and governments manage their money with budgets. Even unsuccessful companies and governments do budgets (though it can be argued they don’t have the right approach). To get ahead with money, you need to manage it. And that is what a budget really is: Money management, on purpose, written down.

If you don’t write down how you’re going to spend the money you make, it will walk out the door on impulsive purchases. This leads to spending more than you can make, and leads to bad money habits like “90-days, same as cash” financing on stupid things, or ridiculous car loans because you had that new-car itch.

I plan my impulses. I build into my budget a set amount of money that I can spend on whatever I want without guilt. This is a relatively small amount — usually $100 per month — but the important thing is that I’m doing it on purpose, and not letting my impulsiveness get the better of me. I’ve been doing this for three years now, so I have some practice, but I didn’t start with a lot of experience, and it didn’t work for a few months, but things came together eventually.

The Cash-Flow Planning Method

Making a budget work takes effort. I won’t hide that fact. Experts talk about different methods. Some will say use theirs, and others will say use whatever works. I will share the method I use. I recommend it because after trying several others, this works the best for me and my wife, and for the people I have worked with through Dave Ramsey’s Financial Peace University at our church. Dave’s idea is very simple.

  • Plan the entire month’s income on paper.
  • Spend every single dollar. This is a “zero-based” plan.
  • Cover the necessities before additional bills.
  • Get an accountability partner to go over your budget with you.
  • Revise as needed when emergencies or unplanned events come up.
  • Plan for emergencies or unplanned events!

Planning Your Budget on Paper

Planning the entire month’s income on paper is fairly straightforward. Yes, it helps if you’re salaried because you know how much you’ll make each month. If you don’t know how much you’ll make each month due to commission or hourly wages, focus on the necessities first.

Write everything down. Dave makes his forms freely available on his website. Print these out and use them. These cover a lot of categories that many people may forget. By writing down the budget on paper, it becomes more real. You’re more likely to actually live by what the paper says, especially if you pin it to a bulletin board you see every day. (Watch for a follow-up post on more modern methods for cash-flow planning.)

Creating a Zero-Based Budget

The zero-based plan means that every dollar, every penny is spent. This makes some people nervous. I was skeptical about this at first as well: “What if I bounce a check?” “What if I overdraft?”

Here’s the thing. When you tell every dollar what to do, and then you actually live that way, you know that a check will never bounce again, and you won’t overdraft your account. We don’t even have “overdraft protection” on our checking account because we don’t need it. While you’re getting used to budgeting, give yourself extra money in the areas where you know you spend more, especially food and entertainment. Remember that the goal is a balanced budget, so in order to reach zero at the end, you’ll need to adjust categories accordingly.

When you look at Dave’s form, you’ll see that it has a certain order:

  • He starts with giving, because if it doesn’t come first, it will be postponed or removed. The subject of giving is a topic unto itself, so I won’t cover it here.
  • Savings comes next. Did you know that on average, Americans have a negative savings rate? There’s many reasons for that, but like giving, it needs to be a priority before anyone will actually do it.
  • After giving and saving comes the “four walls,” as Ramsey puts it: food, clothing, shelter, and transportation are the necessities that we all need to take care of. Food and clothing should be obvious; shelter means mortgage/rent, utilities and required maintenance, and transportation is car payments, gas and vehicle maintenance.
  • After the four walls comes the personal expenses, and then the bills or debt payments.

Working With a Partner

An accountability partner is your spouse or significant other, or a friend or relative that will be honest with you and dish out the tough love. If someone doesn’t love you enough to hurt your feelings about bad choices you’re making, they’re not qualified to be an accountability partner. For married couples, it is absolutely imperative that both people are on board with the financial planning, or disaster will strike the land.

Expecting the Unexpected

Once the budget is prepared, and agreed upon by you and your spouse or accountability partner, it isn’t necessarily set in stone. I know that life happens. Do yourself a favor and set aside some money each month for incidental expenses. This shouldn’t be too much, as you should have an emergency fund to cover the larger events. At least $1000 if you’re still in debt, 3-6 months expenses if not. Large events do not include Christmas! That happens every year at the same time, so plan for it!

Start Now!

To get things rolling with your budget, first download Dave Ramsey’s cash flow plan forms. The “monthly cash flow planning” form is the main one for most people. Further instructions are included on the form. For those with irregular income, use the “irregular income budget” form on the same page. Instructions are also included with that.

Get started today! It doesn’t matter that we’re in the middle of a month. And keep in mind your budget won’t work at first. It didn’t for us, and even after three years we still make mistakes. I can tell you though, if we hadn’t kept at it, we wouldn’t have the sense of freedom we have. Telling your money what to do makes it go further. Plan your spending every single month and you’ll find the freedom I’m talking about, and you’ll realize you make more than you thought.

This article was written by Joshua Timberman, whose passion for personal finance started after reading Dave Ramsey’s The Total Money Makeover. He became debt-free in November. He is the Financial Peace University coordinator at his church, and is an active participant at Get Rich Slowly and other personal finance blogs.

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There are 32 comments to "Budgeting: The most important thing you can do with your money".

  1. Ayrk says 10 March 2008 at 05:26

    I totally agree with this. This budget changed my family’s financial life.

    Previously I’d budget off of yearly averages and it would never work out, usually because of variable costs like utilities. I was always saying that “Well next month should be below average so I’ll make up the difference.”

    When I saw the cash flow budget from Dave Ramsey it instantly clicked. In fact I was embarassed that I didn’t recognize that it was a simple cash flow budget similar to the many I’d had made when earning my MBA. I never shifted from the office to the house.

    So we’ve been on this budget for over three years now and became debt free (minus mortgage) just this January. I can’t tell you how much stress using this budget has removed from our lives. We no longer even think about if we have enough money for something. If it is in the budget it is already accounted for and if it is not, we can always put it in next month’s and purchase it then.

  2. Road to Success says 10 March 2008 at 05:39

    Budgeting is so hard because sometimes it just means you have to completely change your entire living situation and habits (which we all know is incredibly hard to break sometimes).

  3. Dennis says 10 March 2008 at 06:04

    I really like the idea of having someone to keep you accountable. Budgeting is hard and sticking to the budget is even harder. When you have someone with the same goals, it makes it easier to stay on target.

  4. Steve Olson says 10 March 2008 at 06:35

    I hate to be negative here, because this is basically good advice. But the idea of zero sum budgeting is over simplified. I suppose if you only had one or two fixed incomes it would work, but in my household we have at least 8 income streams and they fluctuate. Add in flex spending accounts and bonuses and all budgeting is educated guessing, so zero sum budgeting is a fantasy.

    My wife and I have a method we call supply side budgeting. The problem isn’t the demand on our money, it is the supply, so we focus 80% of our time on increasing our money supply, and it works, because since we have adopted this strategy, supply has outstripped demand every single year. I know if you are a school teacher or a librarian this strategy might not work. But if you are an entrepreneur or in sales, this strategy is gold. Focus time on increased supply, not not saving a buck here or there. You’ll be nicely surprised at the results.

    Now this doesn’t mean we spend without thought or planning. We never buy a car because of an ‘itch.’ We always plan for these things and live far below our means. But we don’t clip coupons, we don’t set food budgets, we don’t set gas budgets, but all luxuries are carefully considered. I think the most important thing is showing self-control.

  5. Michelle says 10 March 2008 at 06:54

    We also have varying incomes. We both do freelance work in addition to having full-time jobs, and my husband’s full-time job doesn’t pay evenly throughout the year since he has to take some lump-sum payments. If we could do zero-sum budgeting, we’d be rich, because I’d be successfully fortune-telling.

    What works best for us is getting a month ahead. Our March money pays our April bills, so there’s time to reconcile the month’s net income before the due dates.

  6. TosaJen says 10 March 2008 at 07:08

    We haven’t had much success with a budget. We track our expenses and make changes based on where we are and where we want to go. We had a bad habit of getting “too ambitious” with our budgeting — wildly underestimating our expenses — and ending up overspending all the time. It worked better for us to evolve from where we are.

    In general, we work to keep our fixed monthly expenses as low as we can given how we want to live. Then, we try to be frugal with purchases (very few impulse purchases), and fix our tracked spending habits as we go. For some reason, it’s easier for us to make the tough decisions based on seeing our real spending, rather than planning for future spending.

    I suppose that if we were to do something completely different in terms of income and expenses, we would set up a budget just to see if we’re “to plan” or getting into trouble. At least, that sounds like the wise thing to do!

  7. LK says 10 March 2008 at 07:20

    While zero sum budgeting sounds like it works, and just might – it’s not for me. I personally like to leave about a $200 buffer. I don’t set a hard limit on grocery costs and such, so that $200 fluctuates up or down depending on that, as well as the occasional surprise lunch or check that goes through from two months ago that I forgot about LOL

    My husband keeps offering to set up an excel budget sheet for me, but honestly I like my system – a monthly office calendar that I pencil in our pay days and bills on. I also pencil in our nights out and anything else that will require spending. I check them off as the month goes on and things get paid, and I can constantly update my buffer to know how much we’ll have left at the end of the pay period or month. I can project through the month and into the next month to get an idea of where we are, where we’ll be, and where we need to adjust. It works for me.

  8. 7million7years says 10 March 2008 at 07:53

    Steve hit the nail on the head; 90% of what I focus on (and write about) is how to increase the ‘supply side’ as he calls it.

    Of course, you HAVE to control your costs … but, it is MUCH more important to your financial future to find ways to INCREASE YOUR INCOME … even for, say, a teacher!

    Come on, you must have a passion?! … think of some ways to make money on the side, while you are doing it …

  9. J.D. says 10 March 2008 at 08:02

    I’m one of those who can’t keep a budget. I understand that they’re important for many people, and can have great power. But for me, they’re too much structure. I stick to my spending plan, which is just a rough outline of where money is coming from and where it needs to go. I focus more on changing my own behavior. If I change my behavior, I don’t need a budget.

    Also, I should note that I’m not convinced that all businesses maintain a budget.

    All the same, I’m grateful to Josh for sharing his thoughts on budgeting!

  10. junkcafe says 10 March 2008 at 08:52

    Thanks, JD, for another insightful entry. For some, “budgeting” is to personal finance as “dieting” is to personal nutrition. If we use the Webster definition of “a plan for the coordination of resources and expenditures” then we can rise above the emotional — and usually negative — response and meet reality head on. I’d been looking for a simple system in my quest for financial health. The zero-based budget is one such approach. I’ll give that a try. For me, I’ll judge it’s success if it does influence a change in behavior.

  11. jtimberman says 10 March 2008 at 08:55

    Thanks JD :-). It is pretty obvious that some businesses don’t maintain a budget at all, and that could be a cause for failure.

    Changing and controlling behavior really is what budgeting is about. In order to change the behavior of money, you have to change your own. Growing up and acting like an adult is pretty important.

    I’m not an expert on irregular income, but I’m planning to write a follow-up for budgeting with irregular incomes based on my experiences helping people in my church through FPU.

  12. elisabeth says 10 March 2008 at 09:07

    I think that budgeting is much more important when one is in debt than afterwards. We are in the post-debt situation and I have found that the habits that got us there now work practically unconsciously to assure that we spend less than we bring in every month — even after adding to savings every month. In which case, a budget doesn’t seem as necessary. But, I do think that it is because we both have incorporated the habit of spending only what is necessary (including “necessary” indulgences, gifts, etc), and have a good cushion for any month in which we spend a bit more than usual.

  13. Miranda says 10 March 2008 at 09:14

    I agree with many comments that more important that having a “hard” budget is modifying behaviors so that the way you think about money changes. We just have a general sketch of our budget, rather than a hard list of expenses that we rigidly have to stick with.

    I do like the idea of giving first — charity and then your own savings. I find that the more generous I am with others and myself, the more I somehow manage to earn…

  14. Leslie says 10 March 2008 at 09:29

    You know….I was one of those people that said all the time that a budget doesn’t work for me. Then I finally did one and, like the first commenter, it has changed my financial life. We never had consumer debt to worry about and we were saving nice sums of money. But, at the end of every month there was always a conversation that started out like this “Don’t spend money you don’t have to until your paycheck comes in…we are a little low right now”. I could never figure out what was happening. We weren’t extravagent spenders and we were good about prioritizing and saving. But, we always ran out of money a few days before pay day or cut it close enough to make me nervous. Then I started doing a budget and I don’t think it is overstating it to say that like magic we suddenly weren’t having these end of month conversations anymore. And, the best part it that it doesn’t seem the least bit restrictive or penalzing. It is actually freeing having a budget and knowing where things are going.

    I do use a zero sum budget but it is actually kind of fluid over the course of the month. Last month, for example, I had some unexpected expenses in household mainenence but I didn’t spend my entire grocery budget so money just got moved from one category to another. Because I keep up with the budget over the course of the month I could see this was happening adjust accordingly.

    Anyway, the whole budgeting thing works fantastically well for me and my family. Quite a surprise after all the years I spent saying it would never work for me.

  15. Sam says 10 March 2008 at 10:05

    This is one of my goals for 2008 – to get a real budget in place. I have a spending plan/yearly budget that seemed to work for us during 2007 when we paid off $55,500 in unsecured debt. Not that we are debt free, except for the mortgage, I really want to get us on a more set budget.

  16. Dylan Ross says 10 March 2008 at 10:06

    You can still have a zero-sum budget with variable income. Assign income to expenses in priority order, and then assign the remainder to one or more categories. For example, what ever is left goes toward extra payments on consumer debt, or half of what’s left goes to the mortgage principal and half goes to savings.

    Also zero-sum budgeting does not mean you can’t keep a small cushion in your checking account. It just means your not adding to it (or eating it away) unknowingly.

    I think drafting a zero-sum budget is one of the most eye opening lessons to understanding the finite nature of cash flow.

  17. Andy says 10 March 2008 at 10:09

    I definitely budgets are good for people who don’t have a good handle on their spending. I think the next step once you are budgeting well and what you can spend is almost instinctual is to do a budget like in Your Money or Your Life. There you just spend without a budget (but still presumably within reason) and then at the end of the month rate whether you want to spend more, less, or the same amount in each category based on different criteria like how much fulfillment it brings.

  18. Kathryn says 10 March 2008 at 10:48

    Great suggestions! I particularly like the idea that you should work with a financial partner to help you set and keep to your budget. One of the biggest problems that we have when it comes to debt in this society is the fact that we don’t always talk about it with people. By making yourself accountable to someone else in this way, you reduce the likelihood that you’re going to make bad budget choices. Thanks for the tips!

  19. Graham Lutz says 10 March 2008 at 11:36

    Live like no one else so you can live like no one else!!

  20. TosaJen says 10 March 2008 at 12:47

    And for those who are insisting that budgets are the Holy Grail for getting and staying out of debt, we haven’t had any debt besides a mortgage since 1997, when we paid off our last car loan. We have been using the YMOYL approach (value-based spending maximize income & savings) since 1995 or so, because that works for us.

    If you haven’t tried budgeting, try it, by all means. But don’t assume that you can’t pull yourself out of debt if budgeting doesn’t work for you. You can — you just need to try other approaches.

  21. Adfecto says 10 March 2008 at 14:37

    I arrived at my own budgeting system through trial and error. When I compare it to what was presented in this post it is very similar. I tally up the income, make savings automatic, check off the expenses, and at the end I’m back down to zero.

    For those who can restrain their spending without a budget, kudos. I have a feeling that works for only a very small percentage of the population. Spending money is easy but holding on to it is tough.

  22. bk says 10 March 2008 at 14:59

    It *might* have been nice to read this if it had once ounce of originality to it and it wasn’t a complete plagarised copy of Dave Ramsey’s website/book/show. Please don’t have guest posters that are basically going to copy and paste someone elses material.

  23. brooklynchick says 10 March 2008 at 16:14

    I am so glad you mentioned giving first! I’ve set up monthly automatic giving to a few select charities – that way I don’t have to worry about it once I’ve put it in the budget. And, it spreads the donation out over the year, rather than giving in big chunks, which for me, cash-wise, is better.

    I work in nonprofits, and I know steady cash flow is important to most charities as well!

  24. Michael says 10 March 2008 at 16:38

    Those who have difficulty budgeting should really try PearBudget. PearBudget has a new web based version that works extremely well for my wife and I.

  25. jtimberman says 10 March 2008 at 17:47


    Thank you for your feedback.

    First, I’m rather offended that you accuse me of plagiarizing Dave’s material, because I referred directly to Dave in my post, and I certainly didn’t have the book out to copy word for word any of the material.

    Now, a few other thoughts.

    “Common sense for your dollars and cents.” “Giving you the same advice your grandmother would – only we keep our teeth in.”

    Those catchphrases from his show are two examples of Dave saying his material isn’t original or new. He also has stated many times on the show, as well as his books and Financial Peace University videos that he didn’t make any of his material up, he just packaged it really well.

    Yes, my post drew on Dave’s material, but I think I packaged it well. I said that I would be describing Dave’s budgeting system in the post itself, because JD asked me to write about the topic specifically. I also think that many people that visit GRS will never read Dave’s books, listen to his radio show or attend a Financial Peace class, but they will read this blog. This was an opportunity for me to clarify some of Dave’s material, as comments on this blog indicate some people might want to know more.

  26. bk says 10 March 2008 at 18:53

    I didnt mean plagarize in the literal sense. You gave credit and yes I would agree you summarized Dave’s budgeting message well and packaged it up with your own twist. I guess I come to sites like GRS for original content from writers that aren’t Dave Ramsey brainwashed. No offense, but If I wanted to read that I would read Dave Ramsey knockoffs like NCN and yourself. But I believe more along the lines of JD that budgeting isn’t all the important but rather self control is the key to financial success. Sorry Dave Ramsey but credit cards aren’t bad if you have self control.

  27. Mike says 10 March 2008 at 20:15

    I am very frugal with money but still believe a budget can he helpful. For most of my life, I have had only 1 bank account (for ease of managing) and 1 active credit card (for convenience and rewards). I could not enjoy life much as each time I thought of spending, it hurt, as my only account showed up as reducing in balance. After reading budgeting blogs, I started to prepare and live by a budget and have at least 6 bank accounts – each with a different purpose. I freely spend the money from 5 of those accounts for specific activities and also, I often open an account for free $25-$100 with some specific planned activity in mind. Budgeting has greatly improved my life and financially kept me more or less the same as before.

  28. Faye27 says 10 March 2008 at 20:48

    Hi GRS,

    Your topic about Budgeting arrived just in time, or not too late to read, coz, just last saturday pm, i just gave a talk about financial management,for our singles org.in our church, focusing mainly on budgeting & investing. Its very seldom in my life that i give a seminar on any topic, and im happy to share my knowledge and experiences on how to manage our finances. Its an overwhelming experience, and im glad that my audience gave a positive feedback. they are very grateful for sharing a very interesting and important topic, a learing experience as they say, and realization on how to handle their lives & money.( I just hope & pray that they will start to practice doing budgeting,I told them that its hard to start, but its the only way to manage their lives.) I just want to share about how i presented my budgeting strategy to my audience. I made a point that in doing the budgeting, you start in order of priority,to live, of course,here are the ff.in its simpliest & general format:

    Income for the month: xxx
    Less:Fixed expenses:
    Tights xxx
    rent/mortgage xxx xxx

    Variables Exp.
    Allowance(for self)xxx
    maintenance xxx xxx

    Other expenses:
    Savings xxx
    debts xxx
    allow.for parents xxx xxx
    excess/defficiencies(shld be + P xxx
    or else, adjust the exp in ====
    personal maint.or defer allow.
    for parents.)

    I know we have different approach on budgeting, but for me, it works very well,
    and it takes a lot of descipline and determination to do this,until it becomes part of your life…

    God Bless! and thank you for your worth reading articles.

    Manila, Phils.

  29. kaonde a.m says 24 March 2009 at 23:26

    budget is the master key, if you want to buy or plan something in future.without budget there is no way you will go forward.

  30. E.F. says 05 July 2009 at 17:01

    Gee..I have had a zero-sum budget forever and didn’t even realize it.:-) I am surprised how many people think budgets are so difficult to set up. My “spending and investment plan” is a simple spreadsheet; but without it, I would feel like “flying blind.” For people nervous about leaving nothing extra in the account, I have this suggestion. I sweep every dollar not allocated for something else into a Money Market Account. If something unexpected comes up and I can’t reduce a different item in the budget, I can just transfer some money back. In the meantime, I earn some interest. Keeping a budget is just a matter of practice. After a while it becomes second nature. The benefits (peace of mind and much higher savings) far outweigh the minor time commitment.

  31. heather says 28 October 2010 at 00:23

    I have a real desire to properly budget. what i dont understand and what I cannot find is how to figure out how much EXTRA to have in my account.
    For example, if my total budget is $3000/month
    and rent of $1000 is due the first week, and I have only been paid $1000 so far, I am left with no money in my account to buy groceries until next payday.

    If this means I need to put extra money in my account, I will do so, I just dont understand how to have a full-proof way of figuring out how much I need to put in my account, without totally unnecessary funds sitting there.

  32. Jason Virga says 03 May 2011 at 16:40

    Another useful budgeting tool is http://www.budgetmath.com. Sooo easy to use and only takes a few minutes. Shows visualizations and lots of information. And it calculates your discretionary income..

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