How to Make a Budget

We all do it. You stop at Starbucks in the morning, and you get a $2 cup of coffee. You go to lunch and you spend $5--or $10--every time. By the end of a month, all these little inadvertent expenses can eat you alive.

When you budget, start thinking about what is precious. What do I want in my life? What is it I hope to accomplish?

Most of us, when we begin thinking about a budget, start to put dollar signs in front of everything. Instead of talking about, "I want to have kids, I want to be comfortable, I want to do these wonderful things in my life, I want to give to charity," we say, "Oh, I want to earn a 20% return in the market." Who cares about a 20% return in the market unless there’s something important that you’re going to do with the money?

So stop, go back to step one and say, "What are my goals? What are my short-term goals? What are my long-term goals?" And if your goals are ephemeral--"I want to be comfortable when I retire"--make them real by sitting down and thinking about what it takes for that to happen.

For me, what was precious was to be able to spend time with my kids. So my goal was to be financially independent enough when I had kids that I could quit my job if I needed to. I knew I had reached that goal when we were able to live on one income. When it came time to have kids, I had negotiating power. It’s all about knowing what the goal is and what it costs.

The second thing you need to do is sit down with your check register and your credit card receipts and write down exactly how much you’re spending--and on what. A lot of you will find a gap between what you’ve written down and how much you have left in your pocket at the end of the month. It’s the black hole of spending; you don’t know where that money went. It was not recorded in your checking account. It doesn’t show up on your credit card receipts. If you have a serious black hole, you need to start jotting down every purchase.

Once you identify where all this money is going, you have the ability to limit it.

But one thing is very important: You should never give up something that is important to you when you budget.

I always liken it to dieting. When I was younger, I was constantly gaining and losing the same 10 pounds. Then my grandmother said to me, "Stop dieting. Eat when you’re hungry. Eat whatever you want, just stop when you’re full." I never had to diet again.

This is the idea of a good budget: You include a little bit of everything you like. You just make sure that you don’t include so much that your short-term want is robbing your long-term need or your long-term precious goal.

When you have a budget, you have a powerful tool. It will enable you to do all sorts of financial planning.

Take life insurance. How many people know how much they need? The first step is having a budget: You don’t know what the gap is going to be between how much you need and how much you’re going to have until you know what you spend. If you know what you spend, you can figure out how much life insurance you need.

Having a budget will help you do your retirement planning. If you have a budget, I can tell you how much you need 30 years from now, not just today. And I can tell you whether you’re on track for getting that amount of money 30 years from now.

Don’t let the fact that it’s going to take you a couple of hours to write things down stop you from using this tool. It’s worth doing, and you don’t have to do it every day. Once you pick out the things that you did inadvertently, once you’re making choices on purpose, you’re done. You never have to do it again.