Having a budget that actually works for you can be a great tool to help achieve your financial goals. By having a spending plan that accurately reflects your goals, you can truly understand how and where you spend your money. Making a budget can also show you where you are unnecessarily spending money that instead could be going towards a more important purpose.

The first step in making a budget is to gather up all your financial statements. This includes bank statements, credit card bills, utility bills, etc. Also include items that may be paid on a yearly basis, i.e. car insurance, life insurance, property taxes, etc. The more information you have on your expenses, as well as income (i.e. bonuses), the more accurately you can define your spending and saving habits.

Calculate the amount of all sources of income. When using the amount of your paycheck, record the net amount (the amount after taxes).

Once you have all your documents together, create a list of monthly expenses. Items that are paid on a yearly, semi-annually or other non-monthly basis should be divided by 12 in order to figure out the monthly cost. Include this cost in your monthly expenses, as it is the amount you should be saving for that specific expense. Also include in this such financial items as retirement savings, RRSP contributions, etc.

Divide your expenses into 2 categories: fixed and variable. Your fixed expenses are the expenses that stay relatively the same each month. These include such items as phone, cable, electric bills, etc. as well as credit card payments. While these may change slightly, they will not increase or decrease dramatically throughout the year. For items such as car and life insurance, property taxes, etc. divide the total amount by 12 in order to find out the monthly amount of money that should be put away for that expense. This ensures that you are not stuck with a large bill that you have not budgeted for.

Your variable expenses are your expenses that tend to fluctuate more throughout the year, i.e. groceries, entertainment, clothing. This is also the category where you will be able to have more control over where to cut expenditures if necessary in order to reach your goals. This also gives you a more comprehensive understanding of your daily spending habits. You may be surprised to actually see how much, for instance, you spend on buying take-out coffee everyday when you see the weekly or monthly total.

People tend to only factor in the major expenses and bills. However, by keeping a daily log of how and where you spend your money, you will have a greater understanding of where exactly your money goes. By doing this for a week, you can have an accurate record of your daily spending habits. This is usually a category where spending habits can be changed in order to free up more money for either other expenses or for savings.

Once your expenses as well as sources of income are calculated and accurately identified, total the amount from each category. If your income is higher than your expenses, then you can prioritize this excess to such areas as retirement savings, paying more on credit card debt, etc. However, if your expenses are higher than your income, you will need to make changes in your expenditures.

Remember to review your budget on a monthly or bi-monthly basis. This will give you the opportunity to review your spending habits, as well as how well you stuck to your budget. You will always need to revise your budget for any financial changes, i.e. raise in pay, major expense (new car, etc) as your budget will have to be re-worked to reflect the changes.