PhotoWhen it comes to getting a handle on your finances, no step is more important than making out a budget – a document that balances income and expenses.

A budget tells you how much money you have coming in each month, where it goes, and how much you should have left over.

“We think that budgeting is one of the most important first steps to take in establishing responsible credit behaviors,” Diane Moogalian, Vice President, Customer Operations at Equifax, told ConsumerAffairs. “If, for no other reason, than it teaches you the importance of actually seeing how much money you make versus what you can realistically spend.”

The first step is embracing the idea that a budget is necessary, and sometimes that can be the biggest hurdle. Bruce McClary, a vice-present at the National Foundation for Credit Counseling, says budgeting should become a habit, and be constructive and consistent.

“Whether it's week to week or month to month, you should sit down and review every expense, and not leave anything out,” McClary said in an interview. “That way you can make financial decisions based on what you know, rather than guessing about what your expenses are, what your income is and how much is going into savings.”

Two categories of expenses

When breaking down your expenses, it may be helpful to have two categories – recurring expenses that are mostly the same each month and those that you can more easily control.

Examples of the first are your mortgage or rent, car payment, credit card bill, utilities, cable TV, etc. Examples of the second include food, gasoline, clothing, etc.

If you are new to budgeting, McClary suggests tracking your spending for a month to see where that takes you. After doing that for a month, he says you will have a better grasp of your spending side and can more clearly see what needs to change.

“This practice can often be eye opening when you’re just starting out with financial milestones in life and credit,” Moogalian said. “Knowing exactly where you stand and what you can afford may help you better manage the financial commitments you make with lenders and creditors.”

Budgeting tools

To create a budget, all you really need is a pen and paper, and access to your checkbook ledger and credit card statements. There are many online tools that can streamline the process. Personal finance site Kiplinger recently reviewed what it said are among the best online budget worksheets to choose from.

Once you have written out a budget, the next critical step is sticking to it, so a budget should be realistic. To help sticking with a budget, you might try the cash envelope system, at least for a few weeks.

Put your credit and debit cards away, go to the ATM, and withdraw the cash you need for the week. Put the money in envelopes for groceries, gasoline, and miscellaneous expenses.

Only spend the money you have allotted for each category. If you can manage to spend less one week, it can be added to the next week's money or added to savings.

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