This is Your Best First Step in Creating Your Budget

Free Budgeting Principles Checklist

Make your budget natural and effective by choosing the budgeting principles that work best for you. You’ll learn:

  • Budgeting principles from the five best budgeting methods
  • How to select the budgeting principles that fit you best
  • How to implement your selected principles into your own budget
  • BONUS: Case Study of what budgeting principles I implemented in my own budget (and how!)

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My number one goal with Atypical finance is to help you get complete control of your money, and I regularly partner with companies that share that same vision. Some of the links in this post may be from our partners. Read my disclaimer for more info.

Part of getting to where you want to be is the journey. Jim Rohn said, “Become a millionaire not for the million dollars, but for what it will make of you to achieve it.” But where do you start?

A lot of us want to improve how we manage our money or build a budget we’ll actually stick with, but it’s hard to know exactly what to do to take that first step.

That’s what this article is about. I want to help you take the very first step in building a budget that you will actually stick with.

Understanding the first step will give you the knowledge you need to confidently make it—and then help you on your journey of learning how to manage your money system in a way that works perfectly for you.

Think about how important the first step is. As babies, we walk before we run. We learn to hold a pencil before we write correctly. We play high school football before going into the NFL.

In painting, Bob Ross, famous for his soft-spoken voice, quick painting technique, and his “Joy of Painting” TV show, learned the basics and was able to combine them into his own style. In music, learning the basics helps you combine techniques and styles to form original songs that no one has heard before.

I was in band in middle school and junior high and studied music for a long time after that. I once considered a career in music. I even have an album called “Seasons” for sale digitally on iTunes and Amazon. I wrote all the music and lyrics and played all the instruments.

I would not have been able to put all that together, know which musical arrangements go well together, and craft a song that’s the right length if I didn’t take that first step in learning the basics all those years ago.

So let’s get started with taking your first step!

Defining a Budget

First, let’s define a budget for modern times. Part of the reason why managing our money is so hard is because as a society we’ve made it so complicated.

Merriam-Webster defines the verb of budget two separate ways with those being broken out in two additional ways each. So that’s four possible definitions in total. They are:

  • to put or allow for in a statement or plan coordinating resources and expenditures: to put or allow for in a budget
  • to require to adhere to a budget
  • to allocate funds for in a budget
  • to plan or provide for the use of in detail

Um…what? I’m a budgeting nerd and even I don’t know the last time I used the word “allocate” in a sentence. Can you imagine if I told my wife, “Hey, honey! I’m going to go allocate some funds. Be back in a bit!” She’d look at me like I had six heads.

Additionally, the noun version of budget has another seven definitions! I will not be listing those here. Needless to say, the different definitions of budgeting are in need of simplification. So let’s simplify. Here is a simplified definition of budgeting.

Budgeting is “a living and breathing plan for your money so you don’t spend too much or too little.”

That’s it. Simple and sweet.

Living and breathing simply means that your budget will grow and change as you do rather than be stagnant and not working for you anymore.

Over the course of my life I have not been interested in the same things. When I was younger it was video games. Now, it’s Disney World and spending time with my family. My budget has adapted to life with me and funded what I value at every stage.

The other part I want to highlight in that definition is the “spend too much or too little.” Depending on where you are now and where you want to be, you may actually be spending too little on certain areas.

It’s easy to say things like “oh you need to save more for retirement” (i.e. spend for the future), but what about not spending enough on what you value?

Did you know it’s actually much easier to stick with your budget if you aren’t telling yourself you can’t spend money on the things you want to spend money on?

This is partly why people think budgeting is so limiting. They are not allowing themselves to spend money on the things they value. Instead, they spend it on the things that make them feel better or what other people tell them to spend money on, and then there isn’t anything left for what they want to spend money on.

Cut out the things you don’t value in order to have money for the things you do value.

That last part of the definition highlights that fact. You could be spending too much money on all the wrong things and too little money on the things that will help you get ahead financially. This first step will help you know exactly how much money you have coming in so you know how to allocate (HA! See what I did there?) your spending accordingly.

We’re going to start with determining your income, but we’re going to do it in a way that you can make sure all your expenses are covered no matter if it’s a good month or a bad month. Let’s get started!

Finding Your LPMI (Lowest Probable Monthly Income)

The first step to any budget is to figure out how much income you are bringing home on a monthly basis. But this isn’t just taking however many checks you get in a month, adding them together, and then calling it a day, especially if your checks aren’t always the same amount. We’re going to find what I like to call your LPMI, or your Lowest Probable Monthly Income.

Your Lowest Probable Monthly Income is a way of underestimating your monthly income so you never have a month where the budget you’re planning for exceeds your actual income. That will be important as you fund the life you want to live.

Your LPMI will be used as your baseline for budgeting. This will be the income that you use to plan your spending. If you’re on a salary, this will be easy enough to figure out. If you are on an irregular income, it’ll take a bit more work. I’ll walk you through it.

Irregular Income LPMI

Types of jobs that would have an irregular income are restaurant servers, any type of hourly work, or any type of commission-based job like a sales position. All of these depend on how many hours you work or how well you perform or sell.

Some months may be down months while some may be pretty lucrative.

To start, find three to six months of paychecks. These can be found by signing in to your bank’s online portal and searching for your income.

If you track your expenses in a budgeting app already (like my favorite, YNAB), you will find them in there as well. Lastly, if your bank still sends you paper statements, you could also dig those out to find your income. The closer you are to that six-month range, the more accurate this will be. 

If you get paid semi-monthly or twice a month, you will only need to be on the lookout for two paychecks each month. If you are paid bi-weekly or weekly, there may actually be some months that you’ll see three paychecks instead of two, or for weekly, five paychecks instead of four.

Ignore these extra paychecks for planning purposes! The reason is that you do not always have that extra money depending on what month it is so it’s best to plan your budget without it.

Now that you have your six months of paychecks, add up each month’s paychecks and write down your total income for each month.

Next, find your three lowest months of income. When you find your three lowest months, add up the total income for your three lowest months and then divide by three.

Congrats! This number you came up with is your LPMI! Let’s take a look at an example.

I find six months of income and find my lowest three months of income were $2,675, $2,897, and $3,450. Next, I add all of those up and get a grand total of $9,022.

I divide that by three and get a Lowest Probable Monthly Income of $3,007. That amount of $3,007 will be used for the “income” part of my budget.

Salary LPMI

If you are salaried or get paid the same amount every paycheck, you’ll only need to have both of your check amounts for the most recent previous two months. For example, if it’s May 12th, you’ll want your two paycheck amounts from April and your two paycheck amounts from March.

The reason I recommend having two months of paychecks is because there are some instances where your two paychecks in a given month are actually different even though you are salaried.

Sometimes companies choose to take out things like healthcare premiums or pretax transportation costs out of only one check per month rather than splitting it up into both. The idea is to just make sure you’re using the right amount for budgeting purposes.

To figure out your LPMI on a salary, first add up your paychecks from the previous full month. Write this number down. Now, add up your paychecks from the month before that and write that number down. Theoretically, these should be the same. If they are, you have found your LPMI. Woot woot!

If they are not the same, determine why they aren’t to see if you should use the higher or lower number. If you had a raise that just kicked in this month, you’ll know to use the higher amount. Remember, to ignore any extra checks you don’t get every month. If one number was higher because of an extra check, use the lower number to plan your spending.

Some Things Not to Include in Your Income

Remember, the idea of this exercise is to find your lowest probable monthly income. That means there are some things we want to make sure are not included in your planned income. Let’s dig in.

Extra Paychecks

I know I mentioned this a couple of times but I believe it’s worth mentioning again. If you are paid bi-weekly there will be two months out of the year where you get a third paycheck. The other ten months you will get the usual two paychecks. For weekly paychecks, it may vary depending on the year, but most years you will have four different months where you will get paid five times instead of four.

Since this income is not an “every month” kind of income, you don’t want to plan your budget around it. However, these extra paychecks are great for reaching your financial goals faster.

Plan for something good with these paychecks. Use them for debt payoff, bolstering your emergency fund or saving, or if those two are looking good with your normal budget, use them for a vacation or something else fun.

Income Tax Refund

I think it goes without saying that you can’t count on an income tax refund as regular money. They can be good for increasing your savings or putting toward debt, but they are even better as part of your paycheck.

If you’d rather have that refund amount split up on your paychecks throughout the year, you can adjust your tax withholdings yourself or talk to a tax professional on how you can adjust them and give yourself a raise without your boss’s involvement. 

Just don’t include these in your budget. 

Bonuses

Companies are funny things because they have to balance what is good for their employees with what is good for the business. That’s why it’s important to not include bonuses in your spending plan.

I’m reminded of National Lampoon’s Christmas Vacation. Chevy Chase’s character, Clark Griswold, announces to his family that with his Christmas bonus he’ll be putting in a pool. His family goes wild! Then, a little bit later on in the movie he finds out that his employer would not be paying out Christmas bonuses that year. Cue the hilarious tantrum followed by Cousin Eddie kidnapping Clark’s boss. 

In real life, if your company took your bonus away, there wouldn’t be anything you could do about it. Let these be part of the same plan as your extra paychecks, or used for something special.

Side Hustle Income

Many of us nowadays have a side hustle that brings in a little extra income. Many hobbies can be monetized, and many people use these for their fun money. 

That’s totally fine, but unless your income from it is extremely regular, don’t include it in your main spending plan. Instead, have a plan for this income on the side. Putting the “side” in “side hustle!”

Any Other Income that Isn’t Permanent

Like the extra paychecks, any other income that isn’t permanent shouldn’t be included in your main budget. Essentially, if it might not happen, it shouldn’t be included.

Take Action

Your very first step in building a money management system that you’ll be able to stick with is to figure out your LPMI, or your Lowest Probable Monthly Income. Here are the steps to take to figure that out:

  1. Gather your past six months of paychecks.
  2. Add up your paychecks in each month to get your monthly income. Be sure to skip any extra paychecks you may get.
  3. Find the three lowest months of income.
  4. Add up your three lowest months and then divide by three.
  5. That new number is your LPMI!

Use this number to start building your money management system. Plan for your LPMI and then if you have a higher income month, decide from there what to do with the extra money.

Building your budget based on your LPMI will give you the peace of mind knowing that your expenses are taken care of even if you have a low month.

From here, you can list out your monthly expenses, see exactly how much you can spend and save, and continue taking steps to build the life you want for yourself. You got this!

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Hey! I'm Tim.

I’m an expert budgeter, author, and Certified Financial Coach. My mission is to not only teach you money principles, but to teach you how to mold them to fit who you are and build the life you want. I don’t like typical money advice. I’ve tried to fit into a mold by using typical money advice and I had less control of my money and went further into unnecessary debt. Now, I live to teach others how to break the mold in their own lives and find their version of financial freedom. Read more about me.

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Download this free checklist with the exact method I used to create my winning budget. You'll learn:

  • Budgeting principles from the five best budgeting methods
  • How to select the budgeting principles that fit you best
  • How to implement your selected principles into your own budget
  • BONUS: Case Study of what budgeting principles I implemented in my own budget (and how!)

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