Budgeting is like a magic trick: everyone is impressed when they see it done but few have the guts to try it for themselves.

Prepare for the tricks of budgeting to be demystified as we pull back the curtain to enable you to make your own cash-flow plan with ease. There are a lot of tasks here, but they all fall under three main steps (via The Prestige)–the Pledge, the Turn, and the Prestige.

The Pledge

Committing to changing your financial reality.

1. The time. Commit to spending 30 minutes to an hour to prepare to change your financial world.
2. A pencil (because there will be lots of editing), paper (or spreadsheet) and a calculator. To record everything from the start to a finished budget.
3. Your exact amount of income each month. If it varies, average the last 12 months, if possible. If you don’t have 12 months worth of income information, go back as far as you can. Don’t just estimate here–calculate your income to the nearest dollar.
4. Calculate your fixed expenses. Record every payment you must make each month: housing expenses, car costs, phone bills, other utilities, debt payments, insurances–anything that you get a bill for each month is recorded here.
5. Guesstimate your variable expenses. Shoot high on your estimation. Try to make an educated estimate about out how much you’re spending on groceries, food, personal money, entertainment, etc. It would be really wise to review bank and credit card statements from the last three months to get a better idea of how much you spend each month.
6. Take into account rare occurrences that happen less frequently. License tag renewals, driver’s license renewals, Christmas, anniversary, travel, weddings, blog hosting fees, birthdays, etc. Anything that doesn’t happen once a month but happens every few months or once a year, write down that item and the cost.

The Turn

The crucial setup of the process: simple math.

7. Write your income at the top of the page. Scratch down the word “Income” on the left side of the page or spreadsheet in what we’ll call Column 1, and put the amount you bring in each month directly across from it on the right side of the page in Column 2.
8. List every fixed expense by name and amount in the columns.  Write the name of the expense on the left under Column 1, the cost each month on the right of the page under Column 2. Write down every fixed expense you have with the amount it costs each month.
9. List every variable expense. Just like you did for fixed expenses, list the name and amount.
10. Divide each of the rare occurrences. Divide by how many months remain before you’ll have to pay for it. Once it comes around the next time, divide the total cost by 12 and you’ll be able to save a bit each month to pay for it.

For example, if I know I have to pay to renew my license and my license plate tags for $110 in November and there is about 7 months until the beginning of November, I divide $110 by 7 and know I need to save $16 each month to accrue $110 by November. For next year, I would just divide the total amount by 12 since I have a full year to save.
11. Add in the monthly cost for each rare occurrence. Slap these numbers we just calculated in Step 10 below your fixed and variable expenses in your giant running column.
12. Add in a buffer. Dave Ramsey calls this blow money. If people will think you’re spending your extra money on drugs because of your category name you can call it something else. Whatever you call it, make sure you have it. I’d suggest a minimum of 1-2% of your total net, monthly income for this category, and add it as a line item to your budget.
13. Crunch the numbers. Subtract every monthly expense from your total monthly income and write the number (positive or negative) at the bottom of the page.

The Prestige

Somehow it just works, and you (and your friends) will be totally blown away.

14. Pick your jaw up off of the floor. If you’re like most people without a budget, you’re probably spending more than you make. Nearly every friend we’ve helped create their first budget is shocked at how much they spend.
15. Slash costs. Cut cable, drop Netflix, get a cheaper phone, eat out less, rent movies instead of going to premieres–whatever you need to do without becoming a complete caveman and hating your new budgeted life.
16. Give every single dollar remaining a category or name. Make sure you have every dollar put in its place so that the total income minus the expenses (and savings is an expense in this case) comes out to $0.
17. Only use cash. This makes following your budget 10 times easier. This isn’t technically required, but it keeps you accountable and ensures you actually follow through on your budget.
18. Adjust categories after each month. The main goal each month: don’t go over! That’s what the blow/buffer category is for. Don’t spend more than you make, but move things around if you must during the month. If you need more money in groceries to eat, take some money out of your entertainment budget that you usually spend on going to the movies so that you’re not watching movies on an empty stomach.
19. Commit to sticking to a budget for three months. You’ll want to give up after the first week. Trust me, sticking it out is worth it and will absolutely change your life.
20. Stand in amazement. After you do the hard work of fighting through the first three months, tweaking and adjusting while you go to make everything work, you’ll be thrilled at how much more you’re able to give, save and do with your money.

Question: What are your best tips for creating the best budget?

Photo provided by sufinawaz.