The third step in creating an effective budget is to develop a cash budget. A cash budget is a plan for controlling cash inflows and outflows. Its purpose is to balance income with expenditures and savings.

To develop a cash budget, you must first determine your annual income. One way to do this is to examine last year's total income and make adjustments for the current year. You should also estimate your tax liability for the current year and your monthly take-home pay.

Next, you must determine your expenses (To complete this step, refer to the record you made while tracking your expenses). First, identify all fixed expenses. Be sure your fixed expenses are truly fixed expenses. Fixed expenses are expenses you don't directly control; they are often (but not always) monthly or semiannual expenses. Examples of fixed expenses include mortgage payments, rent, tuition and books, and life and health insurance costs. While some might consider cable TV or cell phone plans a fixed expense, they are variable expenses.

After you have identified your fixed expenses, identify your variable expenses. Variable expensesare expenses you have control over—you can modify or eliminate the amount you spend on these things. Variable expenses include things like food (to a degree), entertainment, fuel, clothing, magazine subscriptions, and cable TV. (Contrary to some people's beliefs, you can live without cable TV, the Internet or an iPod).

If reviewing your fixed and variable expenses shows that your expenditures exceed your income, or if you find that you live month to month and do not put money into some sort of savings account, look for ways to reduce your fixed expenses and reduce or eliminate your variable expenses.

One of the worst uses of your hard-earned income is paying interest, particularly on credit card and consumer loans. Carefully consider how credit card or loan payments will impact your future income. Pay off your credit card debt and avoid consumer debt! You want to be earning interest on investments, not paying it on debts.

President Heber J. Grant once said:

If there is any one thing that will bring peace and contentment into the human heart, and into the family, it is to live within [one's] means. And if there is any one thing that is grinding and discouraging and disheartening, it is to have debts and obligations that one cannot meet (Gospel Standards, compiled by G. Homer Durham, 1941, 111).

I would like to recommend a better way to budget. Many individuals determine how much they will save according to how much money is left at the end of each month. They receive their paychecks, pay their tithes and expenses, and then save what they do not spend during the rest of the month. This is an incorrect pattern for budgeting monthly income because individuals are paying themselves last. I recommend a different pattern. After you have paid your tithes and offerings to the Lord, pay yourself a predetermined amount or percentage; then budget and live on the remaining income. Using this pattern will help you keep your priorities in order—pay the Lord first and pay yourself second (see Charts 2 and 3).

President Gordon B. Hinckley stated:

In managing the affairs of the Church, we have tried to set an example. We have, as a matter of policy, stringently followed the practice of setting aside each year a percentage of the income of the Church against a possible day of need. I am grateful to be able to say that the Church . . . is able to function without borrowed money. If we cannot get along, we will curtail our programs. We will shrink expenditures to fit the income. We will not borrow (Gordon B. Hinckley, “To the Boys and to the Men,” Ensign, Nov. 1998, 51).

If the Church first saves a portion of the income it receives, does it not make sense that we should too?

From my work with students, I have found that the average student cannot account for about 20 percent of what he or she spends each month. Many students are not sure what is important to them, and so they spend money on many different things in an attempt to find out what makes them happy. Once they understand what is important to them, write down their goals, and begin working toward those goals, they find that saving between 10 and 20 percent of their income is not a difficult challenge. They begin spending their money on things that really matter—things that take them toward their personal and family goals.

Elder L. Tom Perry suggested something similar to this new pattern for budgeting when he wrote:

After paying your tithing of 10 percent to the Lord, you pay yourself a predetermined amount directly into savings. That leaves you a balance of your income to budget for taxes, food, clothing, shelter, transportation, etc. It is amazing to me that so many people work all of their lives for the grocer, the landlord, the power company, the automobile salesman, and the bank, and yet think so little of their own efforts that they pay themselves nothing (L. Tom Perry, “Becoming Self-Reliant,” Ensign, Nov. 1991, 64).

I strongly recommend that students, coming out of school, set a goal to save between 10 percent and 20 percent of every dollar they make after college. My wife and I set that goal nearly 30 years ago, and it has made a significant difference in the life we live today.

Chart 2: Budgeting: The Old Way

Chart 3: Budgeting: The Better Way