I think if one is really being honest with oneself, the thought of sitting down and creating a budget sounds like one of the least enjoyable things about being an adult. Even as a person that writes about personal finance for a living, I can say that there are far more interesting money topics to cover!
But with that said, there is a reason that so many people in my industry really focus on budgeting: It works really really well.
I've had thousands of readers that have paid off incredible amounts of debt or even reached early retirement just by diligently recording where there money comes in and how it leaves their accounts. Fortunately, the steps for actually creating a budget that you'll stick to over a long period of time are fairly straightforward.
Here's how to create a budget that really works:
1. Understand and set your goals
The most effective budgeting is the kind that is done with a specific goal in mind. You'll want to give some serious consideration to why you are going to be tracking your money so thoroughly.
Whether you are hoping to save up for a home purchase, go on sweet vacations throughout the year, or build up the capital to start your own business—you'll want to keep that goal at the forefront of your thought process while you create your budget.
2. Decide what style of budget fits your personality
This is where budgeting can be pretty interesting. There are so many different ways to actually create a budget, and the style and techniques that you choose should be completely dependent on what you actually enjoy doing.
For example: If you like writing things down by hand, go with a pen-and-paper budget. If you love technology, there are plenty of online budgeting tools out there. If you're an Excel wizard, you can easily create a budget with the program.
The key is to align budgeting with a technique that actually interests you so that you'll use a budget long term.
3. Write down your after-tax income
This can be a little bit of a blow to the ego for a lot of people out there. As a society, we've gotten very used to stating our gross income when we tell others and ourselves how much we make.
However, you'll need to figure your net income after taxes to use for your budget. This will give you the most accurate income picture possible when determining your expenses.
4. Determine your fixed and discretionary spending
Your fixed expenses are the ones that generally stay stable throughout the year. This would be your rent or mortgage, car payments, insurance, electricity, etc. Obviously there will be some variation on some of those items that you'll need to account for (like electricity, or gas for your car, for example) during different seasons of the year.
Your discretionary expenses are the ones that are not the same every month and in theory could be reduced or even removed completely from your budget. These expenses include things like Netflix, cable, going out to eat or to the movies.
5. Decide where your debt fits in
Because of the amount of schooling that is required in most cases to become a professional in the psychological field, student loan debt is often looming in the background. The same is true for professionals that have borrowed business capital to start their own practice.
Everyone has a different tolerance level for debt and different goals, but you'll want to determine where your debt fits in to your budget.
Personally, my student loan debt was something I wanted to get taken care of as soon as possible. I made that the top line item in my budgeting and paid toward my loans before anything else (yes, even housing). There is no one-size-fits-all answer to debt, but you will want to give this some serious thought as you move forward in executing your budget.
6. Cut yourself a little slack
It's easy in theory to create a budget that cuts out all of your extra spending, but are you sure you'll actually be able to go a full month without eating out or doing anything for entertainment? I've found that most readers have more success with gradual adjustments to their budget.
The last thing you want to do is create a budget that's so hard to stick to that you ultimately ditch it and revert back to old spending habits. Be realistic with yourself on how much discipline you have when creating your budget and you'll be much happier with the end result.
7. Make adjustments after one month
Budgeting can almost feel a little bit like a science experiment sometimes. You'll want to watch your spending for the first month and see where you had surpluses and deficits in the budget, then make adjustments accordingly.
If you get to the end of the first month and aren't happy with the amount that you have left over after expenses, you'll want to revisit your discretionary income and start making changes.
Sometimes this results in some pretty tough choices (maybe you don't need those 300 cable channels that you rarely watch!), but the end goal you defined in step one needs to prevail here.
8. Decide what to do with any leftover funds
Now for the fun part (hopefully)! If you overestimated on your discretionary expenses outlined above in step four, you can commit that extra capital to anything from savings accounts, IRA contributions, or even extra debt payments to help you reach your financial goals faster.
The most important thing is that you commit to the process
Unfortunately, the vast majority of people never actually become financially successful or even get their head above water. We live in a society and culture that promotes overconsumption, which has a direct effect on most people's ability to create and maintain a real budget.
Find the type of budgeting techniques that works best for you and stick with it. It may not be the most exciting process out there, but it absolutely works with consistent use.
-- Bobby Hoyt is a former high school teacher who paid off $40,000 of student loan debt in a year and a half. He now runs the personal finance site MillennialMoneyMan.com full-time, and has been seen on CNBC, Forbes, Business Insider, Reuters, Marketwatch, and many other major publications.