I’m not going to really cover how I think you should build your first budget ever, but I would like to point you all to this article on MSN Money: How to build your first budget.

It’s a great article, focused at recent college grads (thus it’s not 100% applicable to my wife and I who have been out of school now for 7.5 years – egads we’re getting old) but these few points about where you might be over spending are good reading for anyone:

• Housing: You’ll notice this is the single biggest expense you face, so some cuts here can really make a difference. Consider getting another roommate, renting a room from a family or even moving back with your own dear parents if you can’t get this expense in line. Don’t worry: it’s not forever. Eventually your income will increase and you’ll be able to afford better digs.
• Transportation: If you have a car loan, you may have already busted the bank in this category. Even an economy car costs about $500 a month, said Springboard President Dianne Wilkman, including payments, insurance, fuel and maintenance. If you bought more car than you can afford, consider selling it and buying something less expensive — or opting for public transportation.
• Food: Basic groceries should cost a single person about $150 a month. You’ll spend a lot more if you eat out frequently, however, or if you buy lots of processed foods, frozen dinners and gourmet stuff. Cut your food costs by bringing lunches and snacks from home. Substitute potlucks or picnics for expensive socializing at restaurants. Shop grocery-store sales, and learn to make a few healthy meals at home.
• Utilities: A cell phone, a big long-distance bill or a need to walk around your apartment in shorts in January can all put you over budget in this category. Shop around for cheaper long distance. Conserve energy and wear a sweater in the winter, shorts in the summer. Consider getting rid of the cell phone, or at least switching to a cheaper plan.
• Personal: Let me guess. You’re waaaaaay over budget in this category. The good news is that just about everything in this group represents a want, rather than a need. That means you can easily trim out the fat: Disconnect your cable, or at least switch to basic; ditch the gym; find a cheaper haircut; carry (and spend) less cash and stop smoking.
• Savings: You might have to temporarily trim this percentage to pay off credit-card debt. But don’t cut savings to spend on anything else. And make sure, if you’re eligible for a 401(k), that you contribute as much as you can, but at least enough to get the full company match.
• Debt: If you’re like the average college graduate, you’ve got about $18,000 in student loans and $2,000 in credit-card balances before you even get your first paycheck. Just making the minimum payments in this category can put you over budget.

A few caveats though, from my own personal perspective:

• If you’re single, then you can probably be more risky than I can at this point… Save only after you’ve paid off your smaller short-term debts, ie. Credit Card debt, then save your 6-month ‘safety net’ stash before paying off the rest of your debts.
• Good debt is okay. Buying a house with a mortgage is okay, if you’ve got a good interest rate and the home will appreciate over time, but don’t buy a house that’s too big for what you need… don’t over spend. Buy a car if you need one, but don’t go buy a Mercedes, just because you think you can afford it… get by with as little as you can.
• Eat out less. Remember this rule… you can always eat out less, no matter what your financial situation and it’ll save you a lot of money. Even McDonald’s gets expensive over time. And when you need to skimp food expenses, remember that Ramen is still only about $0.10 per package, and it’ll fill you up.
• Live below your means and make your money work for you, don’t work for your money.

Again, most of those tips apply to any financial situation, so pay attention to them… go cancel that HBO you’re paying for every month. I’m canceling ours tomorrow.

If you’re thinking of buying a Hybrid vehicle so that you can spend less money on your gasoline bill, so you can live within a budget, you should really do the math on whether or not that Hybrid vehicle will actually save you money or not.

It turns out that most Hybrid vehicles today aren’t a financially smart move, as they actually cost you more money to own and operate than a small compact car. So before you buy that new Prius, consider a Corolla…

Read this article for more info: Is a hybrid worth it?

The question might be “Why are you starting to live on a budget?” and the answer is really simple:

We’re frustrated with our current financial situation, and we want to make it better.

But that begs the question… “What is better?”

What are our goals? What do we want?

That’s where you need to focus, if you’re thinking about starting the process of living a budgeted lifestyle.

Without knowing what you want, how can you possibly get there?

And so, our first step to the whole “budgeting process” was to decide what we wanted to get out of our budget. We came up with these answers:

Long term goals: (20 years+ from now, but not prioritized)

1. Have $2,000,000+ for retirement by the time we’re 60 years old.
2. Pay off our house and all of our mid to long term debt.
3. Pay for our children’s college before they start attending college.
4. Make sure that our children are taken care of should one, or both, of us die.

With those long term goals in place, it was easier for us to start planning our short-term goals, or as I like to call them tactics, for how we’re going to get there.

Short term goals: (6 months – 3 years from now, prioritized):

1. Take out life insurance on ourselves, immediately.
2. Save $20,000 in cash for our “rainy day” or “oh shit” fund. (in case we lose our primary source of income) in the next 6 months
3. Pay off our $20,000 in credit card debt within 12-18 months
4. Max out our tax-friendly investment options.
5. Buy stocks on the open market.

So, now we’ve got long term goals, and short term goals. Those goals are pivital to how we’re going to live our lives for the next 3-5 years, and we’ll probably not change must in our tactical execution of our plan until we’ve accomplished all of those short term goals. So, the next thing we’ll need to look at is our details plan for getting those goals accomplished. We’ll tackle that over the next week or so.

So you’ve decided to set a budget and live on it. Congrats!

So have we, and here are the steps we went through as we set our budget, and started living on it:

1. Set your goals. Without good goals, you’ll have no idea what you’re budgeting for. Are you budgeting for long term goals, or short term goals? Do you just want to save enough money to buy a specific thing, or do you want to figure out how you’re going to retire at 40? Set your goals, so you know where you’re heading.

2. Set short term tactical rules and start living by them. In order to reach your goals, you need to figure out how much money you’ll need to spend now, and how you’re going to save for tomorrow. In other words, really build you’re budget and start living by it

3. Re-evaluate your goals and tactical needs periodically. Depending on what kinds of goals you have, you’ll need to re-evaluate those goals and your strategies to get there on a regular basis. We’re planning on doing this annually, and we’re going to do it in October every year, because it’s the month that we travel the least, meaning we should have time to actually do it. Pick a time that works for you that’s realistic. It may be more often or less often than once a year, it just depends on your goals.

Those are the three basic steps to setting a budget, that we’ve best been able to determine over the years. In future articles we’ll deal more with tactics that can be used in your budget.