5 Steps to Create a Budget Worth Using

What happens when you hear the word “budget?” What image pops into your mind? If I had to guess, I’d say the image is something like a spreadsheet or jail cell.

Based on years of working with clients as a fee-only financial advisor, one area which seems to really provoke questions is the budget. Let’s take a deep dive into how to create a budget that works for you and your family. One you can actually live with and doesn’t make you feel like you’re in prison.

Physician Wealth ServicesThe reason why traditional budgeting methods have been so hard to work with is that they lack room for personality, for your goals, and for your dreams. A restrictive budget doesn’t take into account what you’re working hard to achieve day in and day out.

That is until now.

You may have been searching for a budget which is made by you, for you, and can change as your life changes. And the good news is, today we are going to tell you how to create one.

Step One: Determining Your Goals

The very first step in creating a budget is to define your financial goals. Don’t be tempted to skip this step! It’s important to think about what exactly you want to achieve in defined periods of time. Only you can make a decision as to why you want to spend your money on certain things.

Yes, you are a very busy physician with limited hours to devote to this. I promise you this is worth the time!

Ideally, your goals will be a mix of short-term (6 months to a year) and long-term (2 years or longer). This is ultimately up to you, but achieving a goal early on can be extremely motivating.

Think of your goals as your motivator, or your cheerleader, when you are unsure if you feel like putting in the extra effort it takes to learn how to budget.

Examples of a short-term goal could be saving money for a down payment on a home, paying off a particular credit card or student loan, or saving money for a new car. You could also make a goal to set aside 1-2% more of your take-home pay to put towards retirement.

Long-term examples could be to pay off your student loans within 5 or 10 years, send your children to private schools, max out your retirement funds so you can retire 5 years early. Goals which you know won’t happen overnight, but take methodical planning in order to achieve.

Your goals could be a mix of debt-repayment, retirement funding, or eventually investing in a form of real estate. There’s no right or wrong answer here. What is important to you is what will guide your budget. Be intentional with these goals. Use this time to discuss the goals with your spouse or partner.

But be careful not to be too vague or to assign an unrealistic timeline to your goal either. For instance, many physicians would like to retire early – or at least have the option to choose to practice medicine or explore other opportunities. This is a fantastic goal! But instead of just listing “retire early” as the endgame, try assigning an age to the number.

Creating a Budget With Happiness In Mind

In addition to your financial goals, you have to pinpoint what makes you want to get out of bed in the morning. What is the thing (or things or people) you are working so hard for each day?

Since you were little you’ve been taught money can’t buy you happiness. Hopefully, by now you do realize there is a certain truth to the cliché. While having a certain amount of money may not equate to happiness, there are certain categories we spend money on which do bring joy to our lives, or the lives of those we love.

For instance, you’ve been told your entire adult life to cut out spending on things such as expensive lattes from the coffee shop. You’ve been advised to make your own coffee at home, and put this money aside for retirement instead so you can retire years earlier.

But what if you really love coffee, and you don’t want to make it at home? What if going to the coffee shop every day is where you run into your former patients who thank you for taking such good care of them? What if sitting down and having a moment to yourself with a delicious cup of java is the only time you have to think for a few moments?

Where most budgets fail is they don’t recognize how important certain categories of spending are to you. You should be able to find a way to include your lattes in your spending, but it could mean reducing your expenses elsewhere. You have to set parameters in your budget, based on what means the most to you.

Step Two: The Review

You have your goals written down and you’ve defined your motivation. So where do you go from here?

Write Down Your Expenses

One very important step in creating a budget is to take one month writing down all items you spend money on. Don’t hold anything back – no expense is too small. Keep track of all the money you spend, as well as the money you have coming in.

During this one month, you should keep your spending habits the exact same. Do what you always do and record every transaction. Even the small items, such as monthly subscription fees or satellite radio expense, everything is included!

For you spreadsheet lovers out there, this is a perfect time to use one to record your transactions. For me personally, a spreadsheet sounds dreadful. But thankfully there is software available to help automate my expenses. You can use an app, a printable, or a plain piece of paper. Focus on getting all the information together and use whatever tool you prefer. The important thing is to review your expenses in detail when you are first starting this budget process.

When you’re done recording your month’s worth of transactions, make a second list of your big yearly transactions. Try to think of everything which comes up in a calendar year. Your children’s registration costs for pre-school, your Amazon Prime membership, your HOA dues. Include any item you know you should budget for and guaranteed to have to pay each year.

Assign Every Expense to a Category

At the end of the month, sit down and go through the income and expenses. Assign each expenditure to a category. The categories should be things such as mortgage or rent, credit card debt, student loan payments, and eating out. Make sure you have every expense matched to a category.

It’s very important you do not have an “unassigned” category for an expense. If you aren’t sure what to file it under, then make something up which will help you remember. You are making sure every penny is accounted for.

Rank Your Categories

After reviewing this information and assigning every item to a category, it’s time to rank the categories you have picked out. By doing this, you will be identifying what matters the most to you and aligning it to your list of motivators we discussed earlier.

Look at your list you’ve created which has all the categories identified. Start ranking them from the very top, all the way to the bottom.

Most people will probably have their mortgage (or rent) at the top spot. Then you’ll probably rank your student loans and credit cards pretty high (since you don’t want to ruin your credit). It’ll become a little more difficult as you move down the list.

Keep in mind an item could be ranked high as a priority but maybe doesn’t seem like it brings you happiness. Again, using the student loans as an example, the monthly payment might be high in your category ranking because you know it could cause credit issues if you choose not to pay it. Plus, you’re chipping away at your debt.

Do you rank vacations over dining out? Do you prefer lattes from your favorite coffee shop over having the latest and greatest smartphone? Only you can decide what is most important to you. But if you don’t know what you value the most, then you can’t shape your budget to reflect your priorities.

Time for the Initial Analysis

Now it’s time to look at the categories and compare the amounts you’re spending in each one to your goals. How does the spending align with your financial goals (if they do at all) and does your spending represent how you prioritize your categories?

For instance, you can say you have a goal of retiring 10 years early, but when you look at your categories, you realize you are putting more towards pizza delivery than you are towards some type of IRA each month. You may realize you are paying way too much for your cell phone bill versus how much you’re paying towards your credit card payment.

It’s time to ask yourself some tough questions. Is there something which is keeping you from being able to save more towards retirement? Is there a reason you aren’t making higher payments towards your credit card debt? Do you really need the subscription to the meal delivery service which rots in your fridge most times?

You also need to share this information with your partner or spouse. This isn’t a time to assign blame or tell them to stop spending on certain things. It’s a time to sit down and figure out how your monthly spending does or does not align with your financial goals.

Step Three: Creating a Budget to Reflect Your Goals and Your Priorities

You have your goals, you have identified what makes you the happiest (your priorities). You have a clear vision of what it is you want to work towards. But you need something to help you execute your plans. Now it’s time to create the budget which will properly reflect what works best for your money and helps you achieve your goals.

A Simple Formula

I like to recommend using an easy system to determine where every one of your dollars goes each month.

  • 50% of your take-home pay should go towards fixed expenses
  • 25% should go towards variable expenses
  • 25% of your take-home pay should be used towards savings

Fixed Expenses

Fixed expenses are items such as rent or mortgage, your child’s tuition, insurance premiums, utility and insurance bills, cell phones, and credit card payments. Any item which you know you have to pay each month. Even if you had a change in a rate or payment, it would still be fixed because it’s a permanent fixture within your budget.

Variable Expenses

Variable Expenses are a little harder to define because, as the name implies, the costs can vary greatly from month to month. Variable expenses are things like clothes shopping, haircuts, dining out, entertainment, and vacations. You know you are going to spend in these areas but you don’t always know exactly how much.


You may think this is a clear-cut definition for savings, but there’s more to it than just putting a dollar in a savings account. The savings category is any amount which is improving your net worth.

The savings category also includes payments towards your student loan debt and car payments because you are ultimately improving your net worth.

As time goes on, once you’ve paid your obligations towards your student loans and car payments off, then you can allocate those dollars to other types of savings.

Of course, this category is also for the other types of savings, such as contributing to an employer-sponsored retirement fund or an IRA.

Time to Implement Changes

It’s time to put your words into action and start shaping the way your budget works. Let’s talk about fixed costs first.

Remember, 50% of your take-home pay should be dedicated to fixed costs.

Once you’ve identified all items which make up your fixed costs, you need to identify items you can change. For example, your cell phone may be a category you did not rank extremely high on your importance list. However, when you look at your spending, you realize you’re spending way more on your cell phone bill versus other categories you ranked as a higher priority. If you were able to switch to a less expensive plan, then you could free up money to spend on a category which is more important to you.

Insurance premiums are another area where you can potentially save money. You could call and negotiate better rates by bundling services, or by simply shopping around to different carriers. Don’t be afraid to tell your agent what you’re doing and have your agent get to work on improving your premiums.

Implementing changes in each category so you can free up spending for other areas will take effort on your part. Don’t expect to be able to rearrange all of your finances in a weekend. But remember, any progress you do make will be worth it as you start to be more intentional with your spending.

By identifying items you can cut back on, and then other categories you can move more money into, you are creating a framework for a budget which works for you.

Increase Your Savings

One of the areas that is really hard for people to stick to is the area of savings. You might feel as if you have no room left over in your spending to contribute to your emergency fund and retirement accounts.

By identifying the fixed and variable costs which you can potentially lower, you can increase the amount you put towards monthly debt obligations or savings accounts.

Step Four: Creating Individual Accounts

One of the best steps you can take is to automate your expenses and savings as much as possible. This means setting up individual accounts (which can all be done online) and having the money transfer from your paycheck. You don’t have to lift a finger!

One Checking Account for Fixed Expenses

It is highly recommended you simplify your checking account structure to cover your fixed costs. Setup one bank account and automate your fixed expenses to come out of this account. This will not only ease the mental burden for you, you’ll also be less likely to miss a payment (and be penalized).

Individual Accounts for Variable Costs

After you have your main checking account for your fixed costs, you need to set up individual accounts which are dedicated to specific items. These are the items you identified as important categories.

You could have an individual account for vacations, dining out, annual girls or guys trip – whatever you need to set money aside for each month.

If you’re worried about creating so many accounts, using an online bank is perfect for this type of setup. You can automate it to withdraw as little as $5 a paycheck. You can then name this account online so you can easily see your money building up for that particular category.

Automatic Savings Transfers and Debt Repayment

The best way to become more diligent about your savings and debt repayment, is to never let the money hit your account and temp you for other spending! You can set up automatic transfers for the days you are paid and have money go directly to your savings or debt repayment. Doing this will ensure you hit your goals, without the stress of writing a check each month.

Accounts for Yearly Expenses

One last way to ensure you’re covered for all expenses in your budget is to set up accounts for yearly expenses too. These are the items which you know you have to pay each year – holiday spending, Amazon Prime, club dues, birthday parties for your kids.

Add up how much you spend on these items each year and then break it out into a monthly amount. For instance, if you know you spend $3000 on gifts during Christmas, then you would contribute $250 per month to this yearly account. Then you will have your money available by the time December rolls around.

Step Five: Use Additional Tools to Help You Budget

A quick Google search for budgeting tools and you will easily see every option under the sun. There are planners, printables, websites, spreadsheets, and apps. One of my absolute favorite tools to recommend to busy physicians is the Tiller Money website.

The Tiller Money website is perfect for those of you who like to use Google Sheets or spreadsheets. Even if you’re not comfortable with either of those, I promise Tiller makes it easy for you.

You create a budget with this website and then you can see your data update in real-time. It’s perfect for you to securely access your information – as well as anyone else who you want to have access – so you can see your expenses right away.

Another benefit to the Tiller website is how much you can customize it for your budget. You can add and edit the categories (the categories you’ve worked so hard to define) so it can become extremely personalized. You can also set up alerts and reminders for you, so you can remember when you have items transferring to your accounts.

The $5 monthly charge is more than worth it. Tiller Money will allow you to get into a much deeper level of detail with your budget.

A Budget Allows Your Money Work for your Goals

You’ve probably had an experience with a budget in the past which didn’t work the way you intended. It can feel frustrating and constricting, and usually, it won’t last very long. But by incorporating your goals and priorities into the creation, your budget can become an essential tool in your financial management plan.

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