There are basically two ways to go about it.
a) You tell yourself you have a certain number of dollars to spend and you go from there.
b) You start with a room plan, deciding what stays, what goes, what you want to add and estimate how much it will cost.
Actually I guess there is the third option: You have a bundle of cash on hand and you don't care how much you spend on your decor!
~Keep your room theme/style in mind through the entire process.
~ Make a list of all the items in the room that will work with your style as they are. (Maybe you can live with the flooring, the sofa and the fireplace as they are, as an example.)
~ Then list things that have to go. They are the wrong style, color or you just can't stand them any more, or they are worn out.
~ Okay. Now make your want list. List painting you want to do, pieces of furniture you would like to have or need, and any accessories you want and whatever else.
~ After you've made this list, look back at your list of things that have to go. Is there anything there that you could possibly use if it was reconfigured some how? Could it be painted, slip covered, freshened up with pillows, new legs or hardware?
(Example: I had an ugly set of particle board bedroom furniture from the 70's that had a funky design carved out of the drawer fronts. They were still in excellent condition, just ugly. I used wood putty to fill in the carvings, sanded it smooth, added a new faux finish, stenciling and hardware. Then I padded and slip covered the headboard. Looked like a new set!)
~ Go shopping in the rest of your house, attic, garage, Grandma's attic and so on.
~ Now that you know what you have to work with, and what you need to buy, you can decide where your decorating budget money will best be spent..
~ You can basically go through the same process, but you may be building more of a "my ideal room". The difference will be that you may be willing to spend a little more money, and do more of an "everything is out of here" job of decorating since your decorating budget is not limited.
~ After you have gone through the above steps, and have your list of what you need to do or to buy, (get a box of tissue, there may be tears involved!) go out and do some window shopping or get online, and write down prices so you have a better idea of what kind of dollar value you are looking at for your decorating budget. (Make some phone calls if you need to get estimates for having work done.) Total it all up (here's where the tissue may come in handy if you suffer from sticker shock.). Now, you have two choices.

~ If you can, have it all done at once and pay for it or finance it. (I don't propose financing, however there are times that we do it anyway!) You pay for it as your budget allows and you have the money. This is the optimal way if you can't afford to pay for it all at once.
The nice part about this is, you do your room step by step and already know what you are looking for, so you don't make shopping mistakes and buy something spur of the moment! Plus if you find a good sale on an item that's on your list, you can save some money. ( I spent two years shopping for a new dining table and chairs. And when I found the perfect set, I wasn't even shopping for one, it was in a nearby town, and it was used!)
~ The order in which you purchase items is entirely up to you. Choose your most critical areas and start there. Maybe seating is an issue, so obviously you'll want to start with purchasing a sofa or chairs. If you're living in a fish bowl with no window coverings, start there. (It's best to either have or know what you intend to buy in the form of flooring and large furniture items, before you start purchasing fabric for the windows, and room accessories).
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Could that old coffee table be padded & upholstered and used as an ottoman?
Are the drawers broken in a dresser? Take them out, and place a shelf in the bottom of each opening. Repaint & you have Instant shelving with character!
Have your project book with you at all times, so you can match fabric and colors, and keep within your budget!
You never know when you'll find that perfect piece, and they only have one and it's a great deal!
How many times has that happened, and you run home to measure, or get color or fabric samples and you get back and the item is gone?
Budget isn't a four letter word. Whether you have $200 or $20,000, it's still a budget.
So read Budget Decorating to see why you need to determine how much you're spending and where it's going to come from before you even get started.