How to Set Up Your First Successful Budget – Part II (Organizing and Setup)

This post is the second in a three-part series about setting up and maintaining a successful budget. Last week, we discussed what a budget was, how it could be beneficial (or practically essential) to reaching your financial goals, and the research that needed to be completed before we continued with Budgeting 101. The three parts of this series are:

If you haven’t yet completed Part I of this exercise, I encourage you to start there and come back to this post in a week. Otherwise, let’s discuss how to take the information you gathered in Part I and apply it to your own budget.

Financial Organizing 101

Completing Part I of this exercise involved gathering some much-needed information about your income and spending habits. Organizing this information will be very helpful to the next step. Create five virtual or physical piles of information (it may be helpful to use a pen and paper pad to jot down notes if a lot of this is on the same statements):

  • Regular Income
  • Irregular Income
  • Regular Bills
  • Irregular Bills
  • Expense Receipts or Bank Statements

Before You Start

Last week’s post introduced the two types of basic budgets – a limit budget and an envelope budget. You were also asked to decide if you prefer to begin with a broad or detailed budget. Make a decision on which type and scope of budget you’d like to start with and let that decision guide you as you continue…

Setting Up a Limit Budget

Setting up a limit budget involves comparing your income and expenses, and seeking to balance them. For the purposes of this exercise, I’m going to talk about a budget that uses monthly averages. In short, that means that if you have a $120 expense that only occurs in August, your monthly budget would account for $10 of that expense. This also means that you will be over or under-spending your budget in most months due to these built-in averages.

To set up a limit budget, complete the following steps (you may wish to use the category reference at the end of this post as a guide):

  • Consider your paycheck or other regular income first, and calculate your monthly total. If you’re paid bi-weekly, you’ll have to decide whether to take the monthly average (52 weeks over 12 months = 4.33 weeks per month, or 2.16 paychecks per month) or use the total of two paychecks as your monthly income and have two “bonus” months each year.
  • Take the remaining income collected in Part I and determine its reliability. For the purposes of a monthly budget, you may wish to consider any quarterly or yearly income as a bonus, rather than expected income. On the other hand, some of your irregular income may “match” well with irregular expenses for the same month, so including both (or neither) would be acceptable. Decide for yourself if it makes sense to rely on receiving this income regularly. Total all the irregular income you’d like to include, and calculate a monthly average.
  • Total your monthly income from all sources.
  • Before you start looking at expenses, consider an approximate figure for savings and retirement. It’s important to “pay yourself first” when setting up successful savings plans. Consider all of your savings goals individually – retirement, travel, purchasing a home, a baby, etc. and total an estimated monthly figure that would allow you to achieve these in the timeframe you desire.
  • First for expenses, consider your ongoing and regular monthly expenses, primarily your monthly bills and other items that don’t fluctuate. Totaling these is straightforward.
  • Now, consider your regular expenses which occur quarterly or yearly. Total these as well, and determine the monthly average.
  • Finally, look at the receipts you collected and/or your bank statements and make some educated guesses about your varying monthly expenses. These include gasoline, groceries, entertainment and anything else that is not predetermined at the start of the month. Assign numbers to necessities first, like groceries and gas, and keep a separate list of wants, like fun and entertainment. Wants are often the category you will return to in order to cut spending.
  • Once all expenses are in place, determine the total monthly average and compare it to your total income.
  • At this point, one of two things will happen – your expense number will either be below or above your income number. If below – congratulations! You’re almost done…the last task is to determine where you’d like to place the excess funds each month (most likely savings or debt acceleration).
  • If you spending exceeds your income, go back over each of the categories, including savings and determine where cuts can be made.
  • At the conclusion of the process, you should have a budget in which income and expenses balance. Note: A few weeks ago, I wrote about some of the reasons budgets can fail, and mentioned that having a little bit of flexibility is a good idea. That’s why my income always exceeds my budgeted expenses by about $100.

Setting up an Envelope Budget

Setting up an envelope budget is very similar, in its planning stages, to the limit budget. You must consider all of the above steps, including your total income and total expenses, and arrive at a balanced budget. Following this initial planning stage, there is some additional setup work to do for your actual envelopes.

Your first choice with an envelope budget system will be a tracking system. I personally made life easy for myself and use Mvelopes, which is a paid online budgeting service that helps you track all of your envelopes. Alternatives include withdrawing cash and separating it into pre-determined envelopes (I don’t like keeping that much cash around), or using a program like Quicken to set up a large number of fake cash accounts to track spending electronically (eliminates automation in Quicken and a little cumbersome). If you are going to use the envelopes method, I would recommend Mvelopes or a similar service that is specifically designed for an envelope budget.

Once your system is established, the remainder of the work is fairly straightforward. Create envelopes for each of the spending, saving, and irregular expense categories. Once you receive a paycheck, divide the total net amount into the categories as determined by your budget. Once complete, all the money should “have a home” within an envelope.

An envelope budget is beneficial in that, unlike with a limit budget, you will never be “over or under” because of monthly averages. Balances in your envelopes accumulate automatically for irregular purchases, while your area of focus turns away from the overall budget and into specific envelopes to determine how much you can spend.

Next Week – Tracking and Review

Once a balanced budget is in place using the methods described above, the task at hand becomes to track your expenses to ensure “compliance” with your plan. Your homework for this week is to set your budget aside for a few days and to review it mid-week with a fresh perspective. Perhaps there are some things you forgot to consider – a spending category or goal you missed? Take the week to fine-tune your plan before you begin using the budget.

Next Monday, you’ll learn how to track expenses against your budget, and how to make both small and large changes that can help with budget success.  This will be a critical step, and the one least tended to by new budget users who are excited about having created their first plan.

Reference: Budget Category List

This list of typical categories is included to assist you with setting up your budget.


  • Salary or Hourly Income from Paycheck
  • Bonuses and/or Commissions
  • Business or Consulting Income
  • Income from Investments or Savings
  • Gifts Received
  • Hobby Income
  • Tax Refunds


  • Savings and Retirement Contributions
  • Taxes
  • Rent or Mortgage
  • Loans, Including Student Loans
  • Credit Card Minimum Payments
  • ‘Home’ Expenses, including Furniture, Electronics, Cleaning Products, etc.
  • Utilities
  • Auto Loans, Gasoline, Insurance, and Service
  • Groceries and Dining Out
  • Subscriptions and Monthly Dues
  • Insurance
  • Education Expenses
  • Travel/Vacations
  • Entertaining
  • Cash/ATM Withdrawals
  • Pet Expenses
  • Giving Money to Charity
  • Buying Gifts for Others
  • Clothing
  • Health and Fitness
  • Business Expense
  • Professional/Legal Expenses
  • Miscellaneous (try to avoid it!)

2 thoughts on “How to Set Up Your First Successful Budget – Part II (Organizing and Setup)

  1. Pingback: The 2009 Personal Finance “How to” Roundup | AllFinancialMatters

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