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Where it starts
The way that setting up a budget starts isn’t with setting up a budget. It begins with tracking your expenses for three to four weeks so you can see where your money has been going and why it’s all gone by the time you get paid again. You can do this the old school way with a pen and notepad or with your smartphone and an expense tracking app. If you have an iPhone, there’s a fast and beautiful expense tracker called Next. Android phone users could choose Cashbook Expense Tracker or a similar app.
Do a mash up
Step two in setting up a budget is to mash up your expenses into logical categories. This could be food, entertainment, medical costs, insurance, mortgage or rent, transportation and so forth. (Click here for a comprehensive list of budget categories and recommended percentages.)
Where, oh where to make cuts
Now that you know where your money is going you need to figure out where you could reduce your spending. Most people find that the easiest categories are food, clothing and entertainment. But you need to review all your categories, asking yourself the question how can I spend less. For example, if you use the list of budget categories I mentioned in the previous paragraph, you would find that you should probably be spending somewhere between 10% and 13% on food. If you find you've been spending 20%, this is a place where you might be able to make a cut. How about clothing? The recommended percentage for this category is 5%. Have you been spending more? Then this is an area where you might be able to save some money.
Don't forget savings
Make sure your budget includes the category "Savings." Your goal should be to save 10% of your take-home pay each pay period. You should put the money into a savings account and then maybe move it into a CD every quarter. That makes the money a bit more difficult to access, which reduces the temptation to dip into it.
If you don't create goals you may find it very difficult to stay on a budget. You should write down both short- and long-term goals. A good short-term goal might be to save money for a vacation. Long-term goals could be to get out of debt or buy a house. The point is to have attainable goals so that you can see you're making progress. When you can see you’re moving towards realizing a goal, you should find it easier to stay on track.
Your budget shouldn’t be a straitjacket
Your budget shouldn't be a straitjacket. It should be more like a blueprint. As you become more and more experienced with budgeting, you should be prepared to make adjustments. You might find that allocating 12% of your budget for food isn’t enough while 13% for transportation is too much. In this case, you could cut the 13% for transportation down a bit and use the money to increase your food budget.