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What is the First Step in Financial Planning?

Budgeting is the first step to financial planning and it is also the only panacea for good financial health. The importance of making a budget cannot be overemphasized. If you and your family want financial security, following a budget is the only answer. You may think this decision will not have much impact on you but you are sadly mistaken, if you are not making budgets it will impact you and your financial plans.

According to very reliable reports, the average consumer carries around $5,700 in credit card debt as of January 2020, which also means that Americans are spending more than their income.

Coupled with the fact that, according to a recent study by, most Americans don’t have a budget, but they surely think everyone should have one. It’s no surprise that Americans are facing more than $4 trillion in consumer debt.

Budgeting, however, is about a lot more than just debt. While your amount of debt is an excellent data point to have, getting down to the nitty-gritty in a budget is what really matters the most.

A budget essentially provides a road map for your spending, both current and future. It offers you a way to see what you have, what you want, and what you need. While many people associate the word “budget” with restriction, it doesn’t necessarily have to be that way.

Indeed, there are numerous ways to approach creating a budget. Whether you choose to handwrite one — as you would in the Kakeibo-style of budgeting — or use a program like Excel or an app like Mint, Personal Capital, or YNAB (You Need A Budget); budgeting means that you keep track of the money that both comes in and goes out on a daily, weekly, monthly, and yearly basis.

Note that keeping track of this will help you understand your spending (and saving) habits and help you make better financial decisions.

Things to Include in Your Budget

Note that establishing a budget means being able to capture all your spending and your goals, dreams, wishes, and debt in one place. Although this may seem like a daunting task, but you can break it down into bite-sized pieces to make it more attainable. Here’s how.

  1. Create Buckets or Categories of Spending and Saving

Note that the very first thing you should do is to create buckets for the types of spending you do. Based on what you understand about your spending style and what your goals are, you can choose a budgeting method and divide your spending into the designated buckets.

For instance, if you use the 50–30–20 method, then you will have to create three buckets of spending that would include your needs (50%), wants (30%), and savings (20%). If you were using the zero-based budgeting system, you’d track your spending for a few months and then divide the items up into categories to get an idea of where your money goes.

  1. Keep an eye on your financial goals

After you must have figured out your spending habits, it’s time to think about what your financial goals might be. Are you saving for a house? Retirement? A child’s college fund? First know how much money you want to have, or need, and what your timeline is. Once you have your goals in mind, you can start putting a plan and a budget into place to achieve those goals.

  1. Figure out your “after-tax income,” or “take-home pay”

Before you start creating a budget, you will also have to determine what your after-tax or take-home pay is per month. To do that, take a look at your pay checks and add them up for the month. That’s your after-tax income. After you must have figured out what your take-home pay is, you can move onto the next step to figure out what to include in your budget.

  1. Include everything in your budget (non-discretionary vs. discretionary spending)

Note that to set yourself up for success, you have to include everything in your budget. There are two categories of spending: discretionary and nondiscretionary — or extraneous and core. Nondiscretionary or core spending are your basic needs like shelter and clothing. Discretionary or extraneous spending would include things that are optional.

Things to include in a typical household budget that are non-discretionary or core expenses would consist of:

  • Rent or mortgage payments: How much do you have to spend to house yourself each month?
  • Insurance: This includes home, renters, car, health, and any other kind of insurance you pay for regularly.
  • Home maintenance and fees: Do you have a lawn that needs to be taken care of every week? What about painting or maintaining the outside or inside of your home or apartment? Do you have to pay a homeowner’s association (HOA) for the use of common areas? Include these things in your budget.
  • Utilities: Include expenses here for cell phones, Internet connectivity, garbage, sewer or septic maintenance or fees, electricity, water, natural gas, etc.
  • Transportation: Car payments, fuel, and public transportation or regular ride shares should be included in this.
  • Groceries and food: What do you spend on feeding yourself and your family?
  • Medical Bills: Do you have recurring medical bills or regular medical costs that you need to pay for (prescriptions, physical therapy, etc.)?
  • Childcare or schooling: What do you spend each month on childcare while you are at work? What would you like to save for a child’s education in the future?
  • Taxes: Regular property taxes or car taxes and registration are due each year. Make sure you include these in your budget estimate.
  • Retirement: It’s essential to include retirement savings in your budget as well since this is what you will live off of in the future.
  • Emergency funds: A general rule of thumb is that you should save anywhere from three to six months’ worth of cash for an emergency like a job loss or an accident that prevents you from working and earning money. Be sure to have an emergency fund for issues that can and will crop up.

The second category of costs to consider is discretionary spending. This would include:

  • Gym and health club memberships: Do you have a gym membership or belong to a health club, yoga studio, or even a spa that charges a regular fee? Be sure to include it.
  • Recurring entertainment fees: This includes monthly fees for Netflix, Amazon, Hulu, etc. Be sure you include any other entertainment costs here, too.
  • Clothing expenditures: How frequently do you or your loved ones need new clothes? Keep this in mind as you are building your budget.
  • Eating out or restaurant expenditures: These expenses often sneak up on people because they are not frequently included in budgets. If you eat out a lot, be sure to include this cost in your budget.
  • Travel: Everyone needs a break now and then. However, ensure to save for any travel you want to do in the future.
  • Gifts: Does a loved one have a big birthday coming up? Do you want to get engaged or married soon? Do you like to give gifts around the holidays? Be sure to include these costs in your budget.
  • Other little things: Do you tend to shop when you’re bored, sad, lonely, or happy? Do you buy the stuff you don’t really need? Keep this in mind when you are creating a budget.


When you think of financial planning, you are more or less thinking of things like your retirement account, investments, insurance, debt, and savings. While those are all very crucial components of a well-thought-out financial plan, one major thing to include in your planning is your budget. Knowing what to include in your budget is key to getting a financial handle on your spending and saving habits.