To many, the word “budget” is a dirty word. Not only does it mean coming clean with respect to your day-to-day spending habits, it also means facing up to exactly how much money you are bringing in on a yearly basis. Others get turned off at the mere thought of having to crunch numbers or save. But while budgeting certainly has its unpleasant aspects, it is going to help you to manage your money in the long run.

Why is Budgeting Important?

Budgeting is crucial to ensure that we spend our money the way we want to. Even if you feel satisfied with your income and spending habits, drawing up a budget can help you to learn how and where you are most likely to spend your money – and you might make some surprising discoveries. Non-essential expenses, such as buying books, movies, or dinners at restaurants can add up. Even if cutting back on your spending isn’t in the cards for you right now, it is helpful to understand where your money is going in the event that you may one day have to. Most people would rather remain ignorant of where their money is going and that’s normal. But staying in the dark is only going to make it more difficult for you in the future.

Income

In creating a budget, the first thing you need to do is add up your income. If you have a spouse, his or her income should also be included. You can find your income on your pay stub. Additionally, you might have other sources of income, such as interest, a small business, or dividends.

Expenses

Tracking expenses can be a bit more difficult. Begin with the fixed payments that you make every month, such as rent or mortgage, gym memberships, utility bills, telephone or Internet bills, car payments, insurance, and debt.

For most people, these figures shouldn’t change drastically from month-to-month. Once you’ve added up these expenses, use your bank statements to identify what else you’re spending money on. Food and entertainment costs may vary from month-to-month. In addition, if you’re taking out cash and not sure where you’re spending it, start paying closer attention by keeping receipts.

Your Budget

Once you’ve gathered all the information about your income and expenses each month, you can create your budget. Add up all of your sources of income and do the same for your expenses. Then subtract your total expenses from your income. If you’re spending within your means, the number will be positive. If you’re overspending, the number will be negative. Don’t panic, though, as the whole purpose of creating a budget is identifying how to improve your spending habits. Once you’re able to see the difference, you can easily adjust your spending in certain areas. In most cases, adjusting your spending even a little bit can make a drastic difference in the monthly outcome. Don’t go crazy trying to cut back spending in all areas, though; allow yourself some luxuries, if only the less expensive ones ones. Keep in mind that setting small, concrete goals, such as spending less on wine on a month-to-month basis or eating out twice a month as opposed to three times are far more feasible than aiming to limit your spending in all areas.