How To Make A Budget That Works: The TMPF Guide

One of the first things you learn in personal finance is how to make a budget. That's because a personal budget it's a powerful forcing mechanism save money by  getting your organized and focused. Establishing a solid foundation and understanding of what your money is doing, will free up cash flow for paying down debt and investing, as well as multiple other reasons why creating a budget is a good idea..  

Now I know you may be saying to yourself...

Not Actually You

Not A Real Quote

"I know what my money is doing...nothing. I’m broke. I don’t have cash flow."

I get it...and I’ve been there.

But believe it or not, there are many flavors of “broke,” so we’ll need to take a closer look to understand your unique situation. You probably feel like you know where your money has been going each month--and in general, you probably do.

But by taking a cold, hard look at your spending decisions in black and white, you’ll be surprised by a thing or two. I know I was.

We’re going to begin learning how to make a budget by utilizing a simple financial planning tool called the “zero dollar budget.”

how to make a budget

What's a zero dollar budget?

Simply put, it’s a proactive monthly budget that you create prior to the start of the month, where you assign a job to each dollar you have coming in until it equals zero.  

Other budgeting techniques tend to function more as after-the-fact shaming tools, enabling you to view all the damage you did during the previous month, at which point it’s too late to do anything about it.

The concept of zero-dollar budgeting has been around for years and is structured around this simple equation (monthly income - monthly expenses =  cash flow).  Besides simplicity, there are lots of good reasons that personal finance professionals recommend it.

  • A budget proactively highlights spending issues before they arise
  • It forces organization and personal control
  • Reduces the monthly stress brought on by juggling bills by giving you a game plan in advance

How to prepare to create your first budget

This will go way smoother with a just a little bit of prep. Here’s what you’ll need:

  • Paper and pencil
  • Calculator
  • Your last few pay statements or bank statements
  • Any bills you’ve received for the upcoming month
  • 30 minutes
  • Whiteboard and dry erase marker (optional)

The reason for the paper and pencil is that you should really do this by hand the first time since you’ll likely be scratching things out and rewriting it. Once you have it all put together, you can put it any format you like.

Whiteboard with list

Please excuse my handwriting...

How to make a monthly budget

First, write the name of the upcoming month in the top right hand corner of your paper, and “Income” at the top left.

What money is coming in?

Underneath that, list what you know you will get paid in the upcoming month, and the day you will get paid. Be sure to include things like child or spousal support.

Again....Sorry about the handwriting...

Quick Note: How to Treat Irregular Income

For irregular income like commission-based or hourly, include what you typically receive on average. During the month, we will treat anything additional as “extra” cash flow to be used as it comes in.

What money is going out?

Below your income, write “expenses.” Here, we will list your monthly expenses, using the following three categories.

  1. Must Haves: housing, groceries, utilities, phone, childcare, insurance, medical, etc.
  2. Debt Payments: credit card debt, car loans, personal loans, student loans, etc.
  3. Nice To Haves: eating out, gym, cable, Netflix, subscription services (i.e. magazines, etc.)

Identify your must haves

First, list your “Must Haves.” Be honest with yourself here. If it’s not truly a must have, we’ll still include it--just not in this section. Next to each item write the amount due (or average amount spent in previous months) and the due date where relevant.  

Note: For items like groceries, where it’s not one set of fixed expenses for the month, put down your best guess of what you’re spending. This will be a living, breathing document that you will update all the time, so eventually you will get dialed in to how much you are actually spending.

List of expenses

Total Must Have Expense = $3350

Your debt payments

Next, create your “Debt” category. List them them by name, payment amount, due date AND outstanding balance.  This category is inclusive of credit cards, personal loans, car loans, medical loans, and other personal debt.  In the case of a home mortgage, I recommend you include that as a "must have".

List of debt payments

Total Debt Payments = $625

And your nice to haves

Now list your “Nice to Haves” in the same fashion as above (i.e. item, amount due, due date).

Nice to haves are things you enjoy, but could do without. This list is bigger than you think, since you may consider a lot of things to be must haves that really aren’t.  

For example: You need clothes, but odds are you already have some, so buying new clothes would not be a “Must Have” unless it’s something like a new winter coat for your kid or a suit for a job interview. Other common nice to haves include Netflix, the gym, cable, restaurants, movies, piano lessons, etc. 

Putting it all together

If you've been following along, you should now have a prioritized, and organized list of all your income and expenses for the month, like pictured below.

My finished budget...

  • 1
    Must Haves = $3350
  • 2
    Debt Payments= $625
  • 3
    Nice to Haves = $450

Understanding your cash flow

Note: This part is pretty easy math, but having a calculator nearby won't hurt.


Add up all your income and write it down as “Total Monthly Income.”


Add up all your expense by each of the three groups, write them down, and then add up those three totals. Write this down as “Total Monthly Expenses.”


Subtract your “Total Monthly Expenses” from your “Total Monthly Income.” Take that number, positive or negative, and write it down as “Total Monthly Cash Flow.”

Want To Learn More About Cash Flow?

For a few more examples check out this post on how to calculate and manage cash flow which also includes 7 tips for increasing cash flow.  

Shouldn't it equal zero?

Yes!!  That is what makes this number so important.  Assuming that you have a positive number for your cash flow...all of the available cash flow is allocated against one of the following items depending on what phase you are in your financial transformation. 

  • 1
    ​Pay down debt
  • 2
    Build up your emergency sav​ings
  • 3
    Invest for your future

In the next section I'll talk about what to do with a negative cash flow.

Stop! Now review and refine

Take a deep breath...and another look. Now that you have the full picture in front of you, you may not be happy with how you’ve classified some things.  At this point, everyone's  budget will ultimately fall into one of two categories; positive cash flow and negative cash flow.  

Regardless of which category yours falls in, the strategies behind the tool won't change, just how forcefully you apply them. In either case, you need to take a critical look at your income and expenses to identify where the highest points of leverage are so you can create some more margin/breathing room within it.  

Where can you move the needle?

Do you need all the nice to haves?

These are your quickest points of leverage since you have already identified them as expendable.  Cut deep and stop spending money where it's not critical.  Every dollar saved in this category is a dollar directly into your cash flow.  Think about these as your gas pedal.  Hit it!

Are you sure it's a must have?

Challenge your assumptions on what is a must have.   If childcare costs exceed income, one of the parents may be better off staying at home.  If your house payment is more then 25% of your take home pay, you will struggle if you don't lower it. Groceries are typically a huge % of this category, so aim your sights on lowering that amount.

Can you increase your income?  Even for a short time?

If your income is too low,  making adjustments to your expenses are only going to provide you incremental results. Can you do anything to increase your income, even if it's for a short time?  Second Job? Overtime? Sell stuff on Ebay or have a yard sale?  

Hit the debt, hard!

Paying interest on debt is painful, and the higher the interest rates the worst it is.   Truth is , the only sure fire way to get rid of pain is to get rid of the debt.  You can focus on paying it off, or if you have a secured debt with an asset behind it e.g. a car, sell it and buy a piece of junk until you are out of debt.  

Bankruptcy is not always an option

You'll need to think long and hard about before considering bankruptcy.  There are multiple difference "chapters" you'll need to consider, which different implications on what is covered.  It most cases things like government backed student loans, taxes, alimony, are not covered.  If those are places where you carry the most debt, you may not end up any further ahead.  

Put your budget where you can see it!

Once you’re satisfied with your plan, you’ll need to put it someplace visible, where you’ll see it every single day. I put mine on a whiteboard above my desk. As you go through the month, you now have a view of what money is coming in and when, where that money needs to go, when it need to go, and how it’s prioritized in case you need to make tradeoffs to cover unexpected expenses. 

A few days before the beginning of every month, you’ll need to redo this budget to reflect the upcoming month’s paydays and expenses. Remember, it’s a proactive tool not a report!

My finished budget...


Let me go ahead and break it to you--you’re going to mess this up in the beginning. But that’s alright, as long as you learn from it and move on.  Just don’t get frustrated and give up.  Clearly identify what's motivating you.  

You’re developing a brand new muscle, so it will take time for it to gain strength. Give it the reps it needs to get there.  Even though you know how to make a budget, keeping at it takes determination.

If you do stick with it, in a few months you will have a predictable way to manage your finances. This creates the right foundation to enable you tackle even bigger goals, like getting out of debt and investing for the future.  

In the comments below, please share any tips or tricks you learned to help you stick to your budget!

About the Author

Hello, I'm Ryan Rollins. I've been passionate about personal finance and entrepreneurship for as long as I can remember. After earning my Bachelors of Science in Marketing, I soon found myself at my first software start-up. That experience led to me pursuing an MBA in Entrepreneurship from the University of Louisville, and eventually to a career in product management within the financial services industry, where I've spent the last 8 years focusing on financial education and consumer lending. When I'm not working I enjoy spending as much time as I can with my amazing family, going for long runs around the neighborhood, and develop a portfolio of passive investments and income streams. You can also follow me on twitter @TMPF_Ryan