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Setting up a budget is the first step in sorting out your financial situation. A budget will help you to know your financial worth. It will also help you to identify the areas where you need to concentrate on to improve your cash flow. Having a budget ensures that all your expenses are accounted for and you realize their full impact on your finances. Setting up a budget is like having a plan when you start building a house. Without a plan your house will be mess. Similarly without a budget your finances will be a mess. Let us see how you can go about setting up a budget.

Step 1: Resolve to have a budget
First of all resolve to have a budget. It is all very well to say that, I know what my expenses are and hence I do not need a budget. But believe me, having a budget will help you identify areas that you can improve upon.

Step 2: Identify your Financial Targets
The first step in achieving financial independence is identifying your financial targets. You targets will vary depending on your age group. If you are in your twenties then you probably need to save money for your higher education or a car or a house. If you are in your thirties then you need to plan for your family, children's education, savings and also start thinking about retirement. If you are in your forties then you need to think about higher education for your teenage children and also save actively for retirement. This is also the time when you will have an idea about how much you need to save to sustain your current lifestyle. So it is very important to define your targets realistically. Also try to be as specific as possible. Something like, I need $500000 in Retirement Savings by the age of 60. Working backwards from that figure will help you identify how much you need to save regularly. If you are thirty now then this figure is realistic but if you are 55 and earning less than $50,000 a year then this figure is probably a bit over the board.

Step 3: Identify your income
List all your sources of income. Start with your monthly fixed salary and then include any part-time income, spouse income, interest earnings etc.

Step 4: Identify your expenses
List all your expenses. Start with any one month. Try to be as granular as possible and don't ignore any expense however small. For each expense note a broad category under which similar expenses can be clubbed travel, entertainment, education, savings, household, utility, phone etc. Add up all the expenses under each category. If you can jot down expenses

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