Creating a budget is a multi-step process that includes figuring out where you already stand and what your spending habits are, then deciding what your priorities are and allocating your money by month. A budget must fit your lifestyle in order to be sustainable, which means that you need to look at it and make adjustments every few months for it to continue working for you.
Before you decide where you will allocate your money each month, you must first figure out what you're spending. For one week, keep track of everything you spend, down to the smallest purchase. Divide your spending into categories, such as groceries, eating out, transportation, hobbies and entertainment. This will help you to look at what you're spending money on and to decide whether the amount fits your priorities.
After you've figured out what you spend throughout the course of one week, you're ready to calculate what you spend in a month. Multiply your week's expenditures by 4.5, then add them to any recurring payments, such as rent/mortgage, credit cards, utilities or loans. The total should be a good indicator of what you're spending each month, but be sure to factor in some extra room in your entertainment budget for gifts, clothing, haircuts and other irregular expenses. Add in savings of at least 10 percent of your income. Compare your grand total to your income.
Decide what your top priorities are, and that is where your money should go each month. Obviously, your bills and rent/mortgage will take the highest priority, but after the necessities look at what's most important to you. For example, you want to pay off your credit cards, figure out how much you can reasonably pay toward your cards each month by saving in other areas, such as dining out or entertainment.
Every few months, look at your budget and make adjustments as necessary. If you're finding it difficult to keep to your budget in a particular area, consider making that budget a little bigger, then see if there's an area where you can cut back. If you start making more money, look at contributing more to savings or your debt to avoid spending mindlessly. If a budget fits, you're far more likely to stick with it.