Amazing as it seems, the majority of households don’t use a budget.  Financial goals are like all other goals- you need definite goals and a plan of action to get anywhere.  Wandering along with no plan makes it very unlikely that you will reach any goal.  

    The first step is to track your spending.  Some suggest a week, others a month.  I would suggest a month, as you want to make sure that all the bills that wander in throughout the months- such as cable, internet, housing, etc- are accounted for.  The important thing is to track EVERYTHING.  That includes the pack of gum or cup of coffee you buy with a crumpled dollar you found between the car seats.   That also includes the impulse purchase of a pair of shoes- don’t use the “it was just once” excuse.  Buy them if you want, but make sure you track it.

There are a couple of ways to do this.  If you use a finance program such as Quicken, you can simply run a report at the end of the month.  Make sure that you put in anything you buy with cash in a cash account.  Don’t just skip it because you don’t already have one set up.  The second way is to write down everything at the end of the day.  I suggest using an Excel worksheet.  You can divide by category and simply add the daily amounts to the old total to get an updated total.  No messing with a calculator.  

At the end of the month, not only look at the totals spent, but the percentage.  I’m sure you all know how to figure out percentage, but just in case: amount spent on category divided by total spent times 100 gives you the percentage.  For example, you spent $100 on groceries/$1000 spent total is equal to .1.   Multiply times 100, and you spent 10% of your total expenses on groceries.  

    Ideally, your spending for the last month should have been LESS THAN YOUR INCOME.  However, sadly, for many families it is not.  Now that you know what you’re spending, we need to set up a budget that combines the “ideal” with the “reality.”  

"The definition of insanity is doing the same thing over and over and expecting a different result.”  Attributed to Einstein, Benjamin Franklin, and the ancient Chinese, among others.

If following a spending pattern has led to being in debt, continuing to do the same thing isn’t going to get you out of debt.  If not in debt, but with no savings, if you don’t start saving, the money isn’t going to magically appear.  When setting up our budget, we need to shoot for what we ideally want (no debt with savings) combined with where we’re at now.  

    Rules to follow when setting up your budget:
    1) Put away some into savings.  No matter how little the amount, savings will add up over time.  
    2) Make a category for everything and be realistic.  The idea that you won’t buy any clothes for six months is fairly foolish.  Someone is going to need socks, underclothes, or something.  You’re not going to be able to cut your grocery money in half right away.  
    3) Don’t make too few (5 or 6) or too many (30) categories.  You don’t need a special category for household cleaners.  But on the other hand, household cleaners shouldn’t be stuck together with a new washer!  
    4) Reflect YOUR spending patterns.  If you buy lunch at work every single day, try cutting it to every other day.  But allow money in your budget for some lunches at work.  It is unrealistic to expect to completely change your spending behavior over night.  
    5) If you’re in debt, allow extra money for paying it off.  Cut down on dining out, clothes, golf, television, something.