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8 Steps of the Budgeting Process

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Building a solid foundation for your finances starts with an effective budgeting process. In this article, we’ll guide you through the 8 essential steps of a budgeting process that will empower you to make informed decisions, save for the future, and achieve your financial dreams.

Let’s get started!

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Budgeting is a great way to manage your income, debt, and expenses effectively.

To get your financial house in order, you need to be comfortable with the budgeting process.

If you find budget creation scary, don’t worry.

This simple 8-step process will help you.

Let’s dive into the steps:

8 Steps of the budgeting process.

Step 1: Set Financial Goals for yourself

Every good budget starts with defining your financial goals. Without goals, all you have is a loose plan.

Ask yourself, “What do you want to achieve with your money?”

Do you want to buy your dream home, go on a long vacation, or pay off your consumer debt?

Get very clear on your dream and once you know it, create a vision board to bring that dream into reality.

Related Article: How to Make a vision board on Canva

Keep this goal and vision in front of you always.

It will help when you worry about budgeting or creating good boundaries for your financial independence.

Step 2: Calculate Your Income

Determine your total monthly income from all sources. This includes your salary, any side income, or other forms of regular income from part-time jobs.

It’s important to have an accurate picture of how much money is coming in each month. That way, your budget gets more realistic.

This is the most important part of the 8 steps of a budgeting process.

Step 3: Know all your expenses

Track all your expenses for at least 2 months.

This will give you an understanding of where your money is currently going.

Categorize your expenses into different categories like housing, transportation, groceries, entertainment, etc.

This step is crucial to identify areas where you can cut back or make adjustments such as finding cheaper and better alternatives.

sticky note with track your spending, calculator and cash

Related Article: Basic Budget Categories for a Family Householder Budget

Step 4: Analyze your spending

Once you have tracked your expenses, analyze your spending patterns.

You can do this by comparing your bank statements and credit card statements.

Notice if there are any areas where you’re overspending or areas where you can reduce your expenses.

While doing so, do make it a point to regularly check your credit score and credit reports.

Look for opportunities to save money and make adjustments as necessary.

Step 5: Put these into your budget

Based on your income-expense analysis and your lifestyle, choose the best budgeting method.

The most common budgeting methods are:

  • Zero-Based Budgeting:

In this budgeting method, you assign every dollar of your income to a specific purpose.

The aim is to ensure that when you subtract your expenses from your income, the result is zero.

This approach requires you to allocate funds to all your expenses, savings, and financial goals, leaving no money unassigned.

It provides a more detailed and comprehensive approach to budgeting.

  • Percentage-Based Budgeting:

Similar to the 50-30-20 budgeting method, percentage-based budgeting involves allocating specific percentages of your income to different categories.

However, the percentages can be customized based on your priorities and financial goals.

For example, you might allocate a higher percentage towards savings or debt repayment if those are your primary objectives.

If you’re creating your first budget, the 50-30-20 budgeting method is good.

50-20-30 budget worksheet

Related Article: FREE 50-20-30 Budget Worksheet and a Guide.

Allocate your income to different expense categories and set spending limits for each category. Make sure to include savings as a category in your budget.

Aim to allocate a portion of your income towards savings and debt repayment.

  • Envelope System:

The envelope system involves physically allocating cash into different envelopes for different spending categories.

Envelopes and cash for different budgeting categories

This method helps you visualize and control your spending by limiting yourself to the cash available in each envelope.

It can be a useful tool for managing discretionary spending and controlling expenses.

  • Priority-Based Budgeting:

With priority-based budgeting, you focus on allocating funds to your highest-priority expenses and goals first and then distribute the remaining funds to lower-priority items. This approach ensures that your most important financial obligations are covered first and allows for more flexibility in the allocation of funds.

  • Value-Based Budgeting:

Value-based budgeting involves aligning your spending with your personal values and priorities. Instead of focusing on fixed percentages or categories, you allocate funds based on what matters most to you.

This method emphasizes spending on things that bring you joy, and fulfillment, or align with your long-term goals.

Notepad, currency and saving
  • Bottom-up Budgeting:

It is also known as incremental budgeting.

This method involves starting with the previous budget as a baseline and making adjustments based on anticipated changes or needs.

It begins at the individual department or project level and aggregates the budgets to create an overall organizational budget.

The budgeting process typically involves reviewing historical data, assessing departmental needs and priorities, and making incremental adjustments.

Normally businesses and organizations use this method of budgeting.

  • Hybrid Approach:

You can also create a hybrid budgeting approach by combining elements from different methods that suit your needs. For example, you can use the 50-30-20 rule as a starting point but customize the percentages or make adjustments based on your specific circumstances.

No matter which budgeting method you chose, these 8 steps of the budgeting process are always applicable.

Step 6: Monitor your budget

Track your expenses throughout the month and compare them to your budget. This will help you stay on track and make any necessary adjustments.

There are various budgeting apps and tools available that can make this process easier. To start with, use our 50-30-20 budget worksheet.

Busy family with mother father and daughter

Step 7: Review and adjust regularly

Review your budget regularly, ideally on a monthly basis.

When there are any changes in your life such as relocation, marriage, new baby, or any major change, review your current budget.

Assess your progress towards your financial goals and make adjustments to your budget as needed.

Expect to be flexible and adapt your budget to suit your changing circumstances accordingly.

Step 8: Build your Emergency Fund

As you follow your budget, aim to build an emergency fund to cover unexpected expenses.

Start by saving a small amount each month until you have built up a fund that can cover several months’ worth of living expenses.

Additionally, focus on paying off any high-interest debt as soon as possible. This will help you save money on interest payments in the long run.

There are various case studies in the debt-freedom community where people have given utmost importance to having a clear accounting system for emergency funds and long-term goals.

Remember, budgeting is a continuous process. It requires discipline and commitment, but the benefits are worth it. By following these steps and actively managing your finances, you’ll be on your way to achieving your financial goals and gaining control over your money.

These 8 steps work for any budgeting method you choose.

Feel free to experiment with different approaches and adapt them to your unique situation until you find the system that provides the most value and fits your preferences.

5 principles to use in 8 steps of the budgeting process

Every budget process must follow these five principles of budgeting to provide a framework for effective budget management.

  • Clear purpose and objective:

Every budget should have a clear purpose or objective. It serves as the foundation for your financial plan and guides your decision-making process.

Your budget’s purpose may include goals like debt reduction, savings for a specific expense, or achieving financial stability.

Defining a purpose helps you stay focused and motivated throughout the budgeting process.

  • Accuracy:

Accuracy is crucial when creating a budget that works for the long term.

To ensure your budget is accurate, create a habit to gather precise and up-to-date information about your income, cash flow, expenses, and financial obligations.

Make sure that you do the accounting for all sources of income and accurately track your expenses to get a realistic view of your financial situation.

The more accurate your budget is, the better you can make informed decisions and allocate your resources effectively.

notepad with pen and calculator
  • Flexibility:

A budget should be strategic as well as flexible to accommodate changes and unexpected events. Life is dynamic, and circumstances can change with time, so your budget needs to be adaptable.

Leave room for adjustments and unforeseen expenses by including a buffer or contingency fund in your budget. That is why I recommend having at least $1000 saved up in cash for any emergency situation.

If you already have a basic emergency fund, create 3 months expenses fund to ensure you have enough funds for day-to-day living in the case of major unexpected expenses.

Flexibility allows you to handle financial fluctuations without derailing your overall financial plan.

  • Realistic:

A realistic budget is based on practical expectations and achievable goals. It considers your income level, expenses, and financial obligations realistically.

Avoid overestimating your income or underestimating your expenses, as it may lead to unrealistic expectations and frustration.

A realistic budget helps you set attainable goals and make meaningful progress toward them.

If your income is varied every month or season, follow this article to make a realistic budget.

  • Continuous monitoring and Control:

Monitoring and control involve:

  • actively tracking your budget,
  • regularly reviewing your financial progress, and
  • making necessary adjustments.

Continuously monitor your income and expenses to ensure you’re staying on track and making progress toward your goals.

Regularly reviewing your budget helps you identify areas of improvement, make adjustments as needed, and maintain control over your financial situation.

By following these principles, you can create a budget that is purposeful, accurate, flexible, realistic, and actively monitored.

These principles provide a solid framework for effective budget management and help you make informed financial decisions.

What is the difference between bottom-up and zero-based budgeting?

The key difference between bottom-up budgeting and zero-based budgeting lies in the starting point and the level of scrutiny given to existing expenses.

Bottom-up budgeting starts with the previous budget as a baseline and makes adjustments.

Whereas, zero-based budgeting starts from scratch and requires justifying every expense, regardless of whether it was included in the previous budget.

Can Bottom-Up Budgeting be used for creating a personal budget?

Yes, bottom-up budgeting can be used for creating a personal budget as well. While it is commonly associated with organizational budgeting, the principles of bottom-up budgeting can be applied on an individual level to effectively manage personal finances.

In personal budgeting, bottom-up budgeting involves starting with a baseline of your current income and expenses and making adjustments based on your financial goals, priorities, and anticipated changes.

If you have irregular or casual income coming from your hobbies, you can use the bottom-up budgeting method.

By using bottom-up budgeting principles for personal budgeting, you can take control of your finances, prioritize your spending, and work towards your financial goals. It helps you make informed decisions about your money and ensures that your income is allocated effectively to meet your needs and aspirations.

Related Article: Ditch TV and start earning money in your free time

Related Article: How to Budget Weekly Paychecks

Final Thoughts on 8 Steps of the Budgeting Process

By following these practical steps, you ensure that your finances are in order and you’re working towards clearing off the debt faster.

Download our simple budgeting worksheet to get started with your first budget.

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