Seven Steps to Creating a Budget

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By Shelly K. Schwartz
Bankrate.com

You'd never set out on a cross-country road trip without consulting a map. And, likewise, you can't expect to reach your financial goals without developing a plan for spending and saving.

• Track spending for a month.
• Put savings on autopilot.
• Prioritize spending.
• Use cash for daily spending.
• Tackle credit card debt.
• Build emergency savings account.
• Seven ways to live within your means.

Yet, despite their best intentions, many Americans lack the money-management skills necessary to get their bank accounts under control. Why? Often, it's because they don't know where they stand, says Jim Tehan, a spokesman for Myvesta Foundation, a self-help consumer education Web site.

"People write out budgets all the time without knowing where their money is really going," he says. "What they've created is a wish list of how they'd like to spend their money, but it's not realistic. It's a page of lies."

Follow the Money: Track Spending
The first step to developing a budget, says Tehan, is to track your expenses for at least a month, using a checkbook ledger, a sticky note inside your wallet, or a Bankrate daily expense work sheet. Be sure to record every purchase no matter how small, including ATM fees.

"Once you know where your money is going, you can make an educated decision about how best to allocate your money," he says.

Many novice budgeters make the mistake of becoming too financially conservative, at least on paper.

"The No. 1 rule of setting budgets is to not cut all the fun out of your life. Inevitably, Spartan budgets that have no allowance for entertainment are doomed to fail."

Instead, learn to moderate. "If you're eating out every night, and that's something you enjoy doing, try eating out once a week instead," says Tehan. "It's not about cutting out everything that gives you joy in life. It's about better allocating your money."

Make Savings Contributions Automatically
Though every budget scenario is different, Curt Weil, a Certified Financial Planner for the Lasecke Weil Wealth Advisory Group in Palo Alto, Calif., says a good rule of thumb is to allocate at least 10 percent of your earnings toward savings, using direct deposit to pay yourself first.

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