It's not hard to figure out how much you can afford to put in your budget: Just take a look at your paycheck. What's not so easy is figuring out how to divide that paycheck among your "needs" and your "wants" and between the present and the future.
Budget Time Frame
You can divide your spending into daily, weekly, monthly and annual expenses, as well as various time frames in between. Choose a time frame for your budget that allows you to monitor your spending without it becoming a nuisance.
Pick Your Categories
Businesses keep track of expenses by dividing them into categories. You need to do the same thing so you can assign income to take care of your costs. Make your categories precise enough to allow careful tracking of your spending, but not so picayune that you get discouraged trying to monitor them. "Food" could be one category, but you could divide that into groceries and eating out. If you also split out snacks at work, kids lunches, after-work beer, chewing gum -- maybe you've gone too far. Make the categories work for you. For example, leaving "Utilities" -- water, sewer, natural gas, electricity, cable TV, phone, etc. -- together allows you to smooth out seasonal differences, such as higher water and electricity in the summer and higher natural gas or heating oil bills in the winter.
Track Current Spending
Record your spending down to the last dollar for at least a month. Three months -- or more -- is better, because you can average out temporary spending anomalies, such as the week your grocery bill skyrockets because your brother-in-law visits. Examine your records and credit card statements for recurring quarterly, semiannual or annual expenses.
Build Your Budget
Once you know where your money has gone, you can make some choices on where you want it to go. Do you really want to spend that much money on cigarettes? On clothes? Start building your budget by taking care of necessities first. Set aside money for long-term needs, such as replacing cars or appliances, saving for home repairs or a home down payment, retirement or college for your kids. Allow for vacations and entertainment, such as tickets to movies or fees for golf.
Get It In Writing
Use a worksheet to write down your budget numbers. That will make sure you don't leave anything out. Spend extra time searching for any expense that occurs less frequently than once a month -- such as taxes, insurance premiums, magazine subscriptions and 90-day prescriptions.
Monitor Your Budget
Use either a computer spreadsheet program or one of the personal finance software programs or websites -- see Resources -- to make sure the money you've set aside for a certain category stays where it belongs. When your air conditioning stops in the July, you don't want to be holding an empty "Home Repairs" bucket.
Be (Somewhat) Flexible
You can always move money you're saving for a new car to replace a broken TV. However, it's discouraging trying to follow a budget if you must shift money between categories every month because you started with unrealistic expectations.
If you can't make your budget work -- or if you and your spouse can't agree on a budget -- there's help available. The National Foundation for Credit Counseling and the Association of Independent Consumer Credit Counseling Agencies are nonprofit groups that can help you jump-start the process.
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