The first step in your own budgeting process is to think about your financial priorities and goals.

Deciding What's Important to You

A lot of people wish they could meet their financial goals in the future and still live well in the present. You may wonder why you can't retire at 45, and until then, still eat out every day, live in a luxurious house, and lease a BMW. After all, your neighbors live in a large house, drive expensive cars, eat at nice restaurants, wear tailored clothing, send their kids to private colleges, and have a boat — they don't appear to be giving up anything.

Perhaps they're not, and they're much wealthier than you thought. Or (and this is more likely), they are drowning in debt, aren't working toward any financial goals, and aren't doing nearly as well as you think.

Keep in mind that you can live quite well in the United States without really having the means to do so. You can buy a house with very little money down and (for luxurious homes) stretch out the payments for as long as 50 years. You can lease a luxury automobile without having any intention of owning it. You can borrow money to pay for your kids' college educations.

You can buy clothes and boats, take vacations, and eat in fine restaurants using credit cards, paying the money back very, very slowly. When your credit card bills get too high, you can borrow against the equity in your house to pay them off, or you can open up new credit card accounts. This is the way many Americans live — on borrowed money.

But at some point, it all catches up with people, and they either realize they're in deep financial trouble and must do something to get out, or they declare bankruptcy and spend 10 or 15 years fighting to rebuild their creditworthiness and reputation. Still others do nothing about their debt before they die, and their relatives spend years paying back the deceased person's financial obligations.

Only you can decide what's important to you. Don't let advertisements, your friends and coworkers, or your desire to keep up with the neighbors affect your priorities. You probably can't afford everything you want to buy and still reach your long-term financial goals, but you can feel satisfied if you're spending a little money now on the things that are most important to you and still working toward something bigger in the future.

Since you are reading this, you've decided you no longer want to live that way, even if it is the way that so many other Americans live. Instead, you're willing to give up something now to have your financial goals met in the future. Exactly what you give up, though, is strictly up to you; you decide which expenses are most important right now.

You may decide, for example, that life is too short to cut back on vacations, or that instead of spending time cooking, you want to be able to eat out every day and spend that time socializing with your family instead. That's perfectly okay. But in the process, you may, for example, also decide to sell your car or move to a much smaller house.

Don't think you can have it all because, chances are, you can't. But you can retain what's important to you while giving up what's much less important.

Making Your Financial Goals a Reality

Do you want to be debt-free? Do you want to pay for your child's college education? Do you want to retire comfortably at age 65, or at age 45? This section helps you decide and understand what you'll have to do to make those goals a reality.

Your financial goals drive your budget and give you a reason to stick to it. Without written goals that every decision-maker in your household agrees to, you'll have a difficult time resisting spending money whenever the urge strikes.

Use WORKSHEET 1-1 to write down all the financial goals you can think of. Whether you have just one goal or you end up with too many to fit on this worksheet, you're doing just fine. (For now, ignore the “Monthly Amount” and “Priority” columns.)

WORKSHEET 1-1

Now go back and assign a priority to each financial goal, with the numbers five through one meaning something like the following:

• 5. You would be miserable if you didn't achieve this financial goal by the proposed date.

• 4. You'd be very disappointed if you came to the end of your life and hadn't achieved this financial goal.

• 3. You would have some regrets if you didn't achieve this financial goal, but it wouldn't bother you for long.

• 2. While this goal is important, you have others that are far more important.

• 1. This is a fun goal to think about, but you're not really committed to it.

  If you're married or otherwise have a decision-making partner in your finances, each of you should fill out Worksheet 1-1 independently, assigning your own priorities, and then share your worksheets with each other. You'll have to compromise on some goals and you may have to sit down several times to work out the details, but ultimately you'll emerge with shared financial goals that you can both look forward to.

The reality is that you may not have enough income, or you may have too many expenses that you can't cut to meet all of your financial goals. With a prioritized list, however, you can decide which goals you want to attack right now and which ones can wait.

You have just one more step, and that's to turn your financial goals into monthly amounts. Simply divide the total amount needed by the number of months between now and your goal's due date. For a goal that you want to complete two years from now, for example, divide the amount of money needed by 24 to get the monthly amount.

Because you'll earn interest on your savings during that 24 months, you'll actually have a bit more than the amount needed, but because some savings accounts earn less than 2 percent interest, just keep it simple by forgetting about interest for now. (Learn about ways to earn more than standard interest rates.)