If you are going to take control of your financial situation, the most basic thing you will need to master is the idea of a budget. Generally speaking, a budget refers to a list of all income you receive and all planned expenses for a specific period of time, usually a month, or even a year. Knowing where and how much you are spending is the first step in taking control of your money, knowing where you can cut back and planning for financial goals.

So, how do you get started? 

Well, first you will need to know how much actual income, from all sources you receive in a given month. Incoming income should not include one-time gifts of money or payments, as they are not a regular part of your income.  If you are self-employed or have an otherwise variable income, you may want to look at old tax returns and check out your total income for a whole year. Divide that income by 12 and you should have an idea of your monthly income. If you can do this for the last few years, you’ll have a fairly reliable figure of income to work with.

Next you need to know exactly how much you are spending and where you are spending it. It may be helpful to you write down every single purchase for a few weeks. Even a $.50 pack of gum would go on your list. Those little purchases can add up big time. So, if you buy it, write it down. If you used cash, check or debit card or credit card, you might want to keep track of that too, to make sure you are aware of how much you rely on each form of payment. Make sure to write down what it was and what store, or what payment or bill. If you put some in savings write that down too. In the end, you want to be able to account for every cent that came into your pocket for that month.

Now for the hard part. Dividing up your expenses into categories and deciding where each one goes. First, cover your basic needs. Those would be rent or mortgage payment, car payments, insurance premiums, electric, gas and phone bills. daycare costs, food, toiletries and clothing and don’t forget pet care costs for any furry household members. These are things you will pay for every month and cannot be skipped.

Next we will list all our ‘luxury’ expenses. Cable television, internet access, cell phones, entertainment, birthday and anniversary gifts. Even a simple car wash would fall somewhere in this category.  Under the broadest heading of ‘entertainment’ most of the luxury expenses would qualify. Books, cd’s, dvd’s, video games, movies, eating out and concerts. Also hobby supplies would fall under this too, yarn if you knit or crochet, paint if you are a painter, purchases for a collection you are working on. Unless you are making some form of income from your hobby activities, the expense of it falls under luxury.

Internet, cell phones and cable can be tricky. Obviously if you use the internet for you work (and more and more people do these days) it will fall under need, rather then luxury. On the other hand, it may only be an entertainment that you don’t even use that often. Where you put cable tv will be up to you. It will depend on how much you actually watch it and what kind of reception you get without it.  Despite the prevalence of cell phones, in most cases they are just a luxury and a nuisance at the same time. It may be convenient, but that doesn’t make it a necessity.

For myself, I use internet for many different purposes, including business. But also, for long distance I instant message with family and friends who live far away, so that cuts out the expense of long distance for me. I also read both local papers and a few magazines online, cutting out the cost of newspapers and magazines. I do however buy some magazines for collages, so I can cut them up. I do not have cable where I live now. I get fairly decent reception, though not perfect, and a fair number of channels, all four networks (I have move around the antenna to see different ones), three different PBS stations, two local channels that mostly show reruns and old movies and several religious stations. When I lived in Des Moines I did not have that kind of reception. I got only one station, and this was at the height of popularity for “Who wants to be a millionaire” on prime time. They played it for an hour at a time, three nights a week. I called the cable company after a month or so.

Ultimately, where you decide to categorize each expense will be personal to you. Just try to make an honest assessment of each item. Knowing where you won’t compromise is an import part of knowing your financial picture.

The last area is savings. Where this will go is again, up to you. Many experts strongly suggest it go under ‘basic needs’. Some even stress that this should your first payment (to yourself) every month, even before housing. Having some money in savings will ease the stress of emergency purchases and payments. This is also where you would save money towards some financial goal you might have, a vacation or new household appliance. If possible you might want to consider saving money in two different funds. One going towards a specific goal and the other an emergency fund.

Now that you know which way your money flows and what purchases are most important to you, you are ready to find ways you can cut back in many areas and plan for a richer tomorrow. Or at least a tomorrow with less financial stress. And isn’t less stress better?