How to create a budget

Step 1: Calculate money coming in

List all of the money you and your spouse or partner have coming in. This can include money from:

Step 2: Calculate your expenses

List all your costs for a typical month, dividing them into major categories.

If you have trouble defining your expenses, review statements and keep receipts for everything you spend for a few months. Remember to account for occasional expenses, such as vacations (take the typical annual amount you spend on trips and divide that number by 12 to get a monthly average). The goal is to get an accurate picture of where your cash is going. Your spending categories might include:

Step 3: Calculate your balance

Your magic number comes from subtracting your estimated monthly expenses from the money you have coming in.

A positive balance means you will have money left over to save for future needs. Be sure to put this money aside, to cover months when expenses are higher or income is lower.

If the balance is negative, you need to rethink your spending or consider ways to increase your income. This is how your budget becomes not merely an exercise, but a powerful financial management tool. By looking at where your money is going - and where you want it to go - you can use your budget to help control your finances.

Step 4: Revisit your budget regularly

Your expenses will likely vary from month to month, especially if you're a homeowner or have children. Revisit your budget regularly - say, every six months - and compare what you thought you'd spend to what you're actually spending.

By checking in regularly and monitoring progress, your budget will remain relevant and effective.