How to Make a Budget and Stick to It

A realistic budget is your best weapon against overspending.

If you want to keep your spending under control, it's essential that you make a budget. A budget allows you to get a handle on the flow of your money—how much is coming in and where it goes out. With that information in hand, you can make intelligent choices about how to spend.

Keep Track of Your Daily Expenses

The first step in making a realistic budget is figuring out where your money goes. To keep track, you should make an expense record. You may be tempted to turn to a computer program, such as Intuit's Quicken, to keep track of your expenses. That may seem like an easy way to approach the task, but most of these programs have a significant shortcoming—you don't record your cash outlays. Computer programs have you analyze your expenses paid primarily by check or credit card, and overlook the most obvious source of payment—cash.

Rather than relying on a computer program, you can keep track of your expenses in an extremely low-tech but comprehensive way: with some paper and a pen. Here's how:

1. Take out eight sheets of paper. You will use one sheet per week, meaning you will record your expenses for two months. By doing this, you'll avoid creating a budget based on a week or a month of unusually high or low expenses.

2. Select a Sunday to begin recording your expenses.

3. Record that Sunday's date in the blank at the top of one sheet of paper.

4. Carry that sheet with you at all times.

5. Record every expense you pay for by cash or cash equivalent: check, ATM or debit card or automatic bank withdrawal. Don't record credit card charges, as your goal is to get a picture of where your cash goes. When you make a payment on a credit card bill, however, list the items paid for.

6. At the end of the week, put away the sheet and take out another. Go back to Step three.

7. At the end of the eight weeks, list seasonal, annual, semi-annual or quarterly expenses you incur but did not pay during your two-month recording period. The most common are property taxes, car registration, magazine subscriptions, tax preparation fees, insurance payments, and seasonal expenses such as summer camp fees or holiday gifts.

Total Up Your Income

Your expenditures account for only half of the picture. You also need to add up your monthly income.

On a blank sheet of paper, list the jobs for which you receive a salary or wages. Then, list all self-employment for which you receive income, including farm income and sales commissions. Finally, list other sources of income, such as the following:

• bonus pay
• dividends and interest
• alimony or child support
• pension or retirement income
• public assistance

Next to each source of income, list the net (after deductions) amount you receive each pay period. If you don't receive the same amount each period, average the last 12.

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