Six Steps in Planning a Budget

Analyze your main sources of income. Add the weekly or monthly pay amounts of all salary-earners in the household. For wage-earners, calculate an average of the last four paychecks before adding the amount to the household total.

Identify all of your weekly, monthly and annual expenses. Include all expenses, from staples such as groceries, gasoline and diapers to allotments for entertainment such as movies and live sports. Break expenses down into categories, such as “Household Items," “Car Expenses” and “Entertainment."

Do not neglect to account for large, irregular expenses such as Christmas shopping and summer vacations in your budget. Add these items into the budget for the month of the expense, or several months ahead if you need time to set money aside.

Determine a reasonable percentage of your income to set aside in savings or investment accounts. The more you can siphon off into savings, the better. Ten percent is a decent amount for a young couple, but saving even as little as 1 percent can help you to establish solid habits and start a pattern of putting money aside.

If 10 percent is not a reasonable amount, try to following exercise: add up all of the money that you spend on dining out and entertainment in one week, and you'll have an idea of an amount that you can reasonably set aside per month without it cutting into your bills and necessities. Try saving this amount for one month, then adjust the amount up or down depending on how it works out.

There are a range of options to choose from when you're ready to create your budget template. You can keep it simple, using a pen-and-paper system, or you can use a computer software package. Spreadsheet programs allow you to create your own budget from scratch, or enter your expense and income items in a pre-made budget template. Other programs, such as Quickbooks, create custom-tailored budget templates based on your income and expense items.

If your total income is sufficient to cover your expenses and investments, create a weekly or monthly budget allocating exact amounts for each expense item. Create a spreadsheet listing all the expense and income items you identified above, then enter the amounts you actually spend for each category next to the category's budgeted total on a daily basis. Remember, a budget is simply a spending guide; the real power of a budget comes from self control and dedication.

Take the time to look over the budget at this point to ensure that it is reasonable and all income and expenses are accounted for. If, when your budget is completely written out, you find that your total listed income is less than your total listed expenses, look for ways to reduce your expenses, or, as a last resort, reduce the amount of money you set aside for savings and investment, before you actually put the budget into action. For example, if you've decided to set aside $200 per month for savings, but you find that the first draft of your budget would leave you $50 short of your mortgage payment, consider reducing the amount you plan to save to $150 per month.

To bring your planned expenses more in line with your income, consider reducing your entertainment expense, but do not make the mistake of eliminating entertainment altogether. Entertainment expenses can be necessary for stress-relief and maintaining healthy family relationships. Consider reducing your groceries expense by shopping at budget grocery chains, or reducing your gasoline and car expenses by using public transportation half the time.