by Barbara Anderson

Created on: September 26, 2008   Last Updated: January 29, 2009

So many of us these days are faced with too many bills to pay, and not enough money to pay them. In order to solve this problem and gain better control of your financial life, you need to have a budget. There's nothing mysterious or complicated about setting up a sensible budget. You can use a computer program or spreadsheet, set it up on paper, or even simply divide your cashed paycheck into a series of labeled envelopes like many of our parents used to do.

Step 1 - Make a list of your monthly income.

Use your pay stubs to figure out your average monthly take-home pay. Find your monthly bank and investment statements and use these to estimate your average monthly income from interest, dividends, or other sources.

Step 2 - Make a list of your monthly expenses.

Divide these into two groups: necessities and "nice to have" discretionary expenses. Necessary expense categories should include entries such as rent, mortgage and loan payments, food, insurance, telephone, utilities, and clothing. Discretionary expenses should include movies, eating out, hobbies, etc. Go through your checkbook, bills and credit card statements for the past three to four months to make sure you have listed every expense you can remember.

Step 3 - Estimate a monthly amount for each expense.

For each expense category, try to estimate a budgeted amount that reflects your past actual expenses. Your goal is to keep your estimated total expenses less than your estimated monthly income. Remember, that although you have no control over fixed monthly expenses such as rent, you can control discretionary expenses such as dinners out.

Step 4 - Track your actual expenses.

Start writing down what you spend each time you pay a bill or buy something, whether you pay by cash or credit card. At the end of the month, categorize these by expense and write down the total amount spent for each expense category. Then, add up the grand total of all of your monthly expenses.

Step 5 - See how your budget compares to actual expenses.

Compare your total monthly expenses to your total monthly income. Was your income higher than your expenses? Excellent! Now, deposit most of this extra money in a savings or investment account so you are not tempted to spend it. If you spent more than your income, review your actual expenses versus your budgeted expenses to see where you can possibly cut back.

Step 6 - Review and update your budget.

After you track your actual spending for a few months, review your budget to see if it is working or needs some adjusting. You may have to take a hard look at your spending patterns to see if there are any ways to further cut expenses comfortably. If you cannot cut expenses, you will have to think about ways to increase monthly income.

So, as you can see, there is nothing complicated about setting up a sensible budget. The hardest part is sticking to it.

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