It's a good idea to put together a budget worksheet to get started in setting up your budget. You'll get some help on doing it here, but make sure the categories you use fit your personal lifestyle. Use the basic common categories that apply to everyone, such as housing, utilities, insurance, and food, but customize the other categories to fit your personal situation.

Your categories should be detailed enough to provide you with useful information, but not so detailed that you become bogged down in trivia. First, list all your sources of income:

• Wages from your job(s)

• Bonuses Child support or alimony

• Rental income

• Interest income

• Dividend income

• Capital gains income

• Other income

Next, list the expense categories you want to track. Start out with a little more detail rather than a little less. You can always combine categories later if you find expenditures in one category are so small that they don't warrant being tracked separately.

Sample Expense Categories

Don't forget things that come up throughout the year but are not monthly expenses, such as subscriptions, holiday gifts, clothing, birthday gifts, insurance, maintenance agreements, adult education classes or seminars, car repairs, medical expenses, and so forth. To tweak your memory about the types of nonroutine expenses you're likely to encounter, look back through your records for the last year.

Think about your own personal habits (smoking, drinking, buying lunch at work) or hobbies you engage in (woodworking, skiing, boating, golfing, gardening) to identify other spending categories. Some of your spending habits might make you uncomfortable when confronted in black and white. That's okay. Identifying them doesn't change the facts; it just brings them to light so you can make a conscious decision about your spending. It's not the purpose of budgeting to make you feel guilty about how you've spent your money in the past.

How Much Money Do You Have Available?

To curtail overspending, you need to set realistic spending goals in each category. First, figure out how much money you have available, and where that money goes now. To get started, collect as many of your pay stubs, bills, credit card statements, and receipts as possible for the last three months and complete the income section of your budget. Calculate your average monthly gross pay (before taxes) by adding the gross pay from a month's worth of pay stubs. If your pay varies substantially from one pay period to the next, try to calculate a realistic monthly average, but don't include uncertain amounts such as year-end bonuses or overtime until you're actually paid for them. Estimate monthly averages for the other income categories as well.

Where Is Your Money Going?

In addition to bills, credit card statements, and receipts, your checkbook register will be important in completing the expense portion of the worksheet. Go through these documents and jot down your expenditures in each of the categories you've set up, then total the numbers in each category and transfer them to the worksheet. For the items you identified that aren't paid every month, calculate the yearly cost and divide it by twelve to get the monthly cost for your budget worksheet. Each month, set aside the monthly amount in a savings account so it's available when the bill becomes due.

To really get a fix on where your money goes, you'll need to keep track of your cash expenditures, too. Save receipts to record later, or jot the expenditure down on a notepad as you use cash. The more often you use an ATM, the more important it is to write down your cash expenditures, because this is where many people lose control of where their money goes. Tracking your cash expenditures is one of the more tedious aspects of budgeting, but it's where you have the most potential for budget leaks, and it can be shocking to discover how much cash slips through your hands each month.

Tracking Small Expenditures

You may think you know where your money goes, but most people are more than a little surprised when they really start tracking their expenses. Small cash expenditures can add up to significant sums of money by month's end. That daily cup of coffee is probably costing you almost $600 per year. Three six-packs of beer a week add up to at least $600 per year. If you smoke two packs of cigarettes a day, it's probably costing you over $280 a month, $3,360 per year, or $33,600 in ten years — and that's if you discount the impact of inflation! Furthermore, you might set yourself up to save on health care costs down the road.

Finding Ways to Reduce Spending

After a month or two of tracking your actual spending, you'll begin to see a pattern, and will be better able to identify where you can comfortably make adjustments to start saving money. Consider this a process of self-discovery. You can start with an in-depth look at your largest spending categories if you prefer, but don't overlook the smaller categories. Sometimes these are the easiest to make cuts in because the spending may be more discretionary, and small amounts can add up quickly.

Identify areas where you can painlessly save money that you can use to build an emergency fund or save for an important goal. Brainstorm about ways to reduce spending in specific categories. Cutting costs becomes a challenge that can be very rewarding, especially as you see your savings grow.