Step One - Expenditure Tracking

Write down everything you spend for two months. Have categories that make sense (entertainment, utilities, etc), so you can see where the money is going. You'll be surprised at how much money is spent in some areas, and you might also find that as you watch the money going out on paper, you begin to change your habits. Looking at your convenience store purchases on paper motivates you to skip a soda or two, just so you don't have to write it down. This a good exercise to repeat every year or so, if only for the habit-changing effect it has.

Step Two - Reduce Expenditures

Do this before you start making the actual budget calculations. Get spending under control and then you will have a better idea of how much to allocate to each category. With a bit of thought you can cut the cost of most things and activities in your life. Turn down the hot water heater temperature, combine trips to save gas, bring a lunch to work instead of eating at a restaurant. Find the relatively painless ways first - like spending an hour to find a cheaper insurance policy for your car. If these are enough, you may not need more drastic measures.

Step Three - Make a Budget

Using your current income and your expenditure tracking notes, create a monthly budget, allocating money to each category expenses. You may need $250 per month for groceries, $300 per month for paying down credit cards, and $120 for the retirement account, for example. Be sure to include all regular expenses. The totals should add up to a bit less than your income. If not, lower those allocations and take more cost-cutting measures.

You need to account for large and unpredictable items as well. You don't know when a car repair will be necessary, for example, but you do know it is an eventuality. Try this: add up the amount you spent on your car over the last two years and divide by twenty-four to get a monthly figure for expenses.

Step Four - Set Up Systems

You'll need systems for following your budget and tracking money spent. For things that are hard to track, like convenience store purchases, you can put the allocated money in an envelope at the beginning of the month. When it is gone, you are done until the next month starts and the envelop is refilled. For large expenses, like car payments, repairs, insurance and registration, it may be best to set the money aside in a separate bank account, where it can accumulate until you need it. Medical expenses can be handled this way to, and you should have an account or envelope for the "completely unexpected."

Budgeting Based On Values

Certainly it can help to learn to budget money, but there is another approach that begins with asking why you are making money in the first place. You need it to survive of course, and the steps above will help with that, but you don't manage your money just to pay bills. After all, money is a powerful tool that can serve you in your pursuit of anything that is important and valuable to you.