Setting up a personal budget is not rocket science. In fact, it’s downright simple. At most it involves a bit of thought, discussion with your spouse, planning, and diligence.

One mistake people make when setting up a personal budget is the order in which they do the steps. Most people sit down, write down their income, then begin listing their expenses. This is effective to a certain point – but the process begins to unravel as you get more into the “gray” area of your personal budget – setting yourself up for failure, disappointment, and budgetabandonment (no it’s not a typo, it’s a fairly common disease).

A typical budgeting mistake
For example, John sits down to begin the process of setting up his family or personal budget. John makes $4,000 per month on salary (this makes the salary part easy, the variable income question is handled here). What’s the next thing John writes down? His mortgage. That’s also an easy expense. Perhaps then he writes down his car payment (ouch), health insurance premium, internet charge, etc. Eventually, John will have exhausted his fixed expenses (and possibly forgotten a few). Next comes the variable expenses. This includes groceries, utilities, entertainment, miscellaneous, restaurant, etc. Here’s where the budgetabandonment sets in! How the heck will John know what to budget?

His steps are all wrong. Simplify the process of setting up your personal budget by just switching the order around a bit:

Steps for Setting up Your Personal Budget

1. Write down every penny you spend for one month.
2. Take a look at your spending – analyze the historical data.
3. Based on your analysis, forecast what you will spend in the coming month.

Do this every month and you’ll be set.

Some people really get hung up with the order of these steps. Maybe right now you’re thinking: “But I want to begin budgeting now.” While I admire your desire to attack it and really get on a written spending plan, I just want you to be patient. If you want to budget effectively you need to be comfortable with the budget being an evolutionary process – not a one-time thing.

I recommend writing down every expenditure first because you will need to understand what you are really spending. Until you understand that, your budget will be off the mark. That’s what leads to the disease I just mentioned above. Now, if you’re really fired up and want to set something up right now, go ahead. Then write down everything you spend to compare it with what you originally thought. It will be enlightening to say the least.

Most people spend way more than they think they spend.
It’s always fun to see the reaction of someone once they finally tally up their entire purchases for one month. They’re shocked at all the money they wasted. This is the power of making step one your first step in setting up your personal budget.

Be patient, take your time, learn about your spending, let your budget evolve.

The YNAB System’s Four Rules of Cash Flow Management keep you in line even when your budget is a bit off.

Remember, when setting up a personal budget you need to make sure you are patient with yourself. If you’ve never done a budget before you cannot realistically expect it to be even close the first couple tries. Be patient. Take your time. Learn about your spending. I can promise you, from personal experience, that there is power in writing down every single purchase you spend. That data becomes very, very valuable to you. Use it wisely and grow wealthy.