Create a list of all of your monthly income. If you have any sources of income that are received annually then simply divide this number by 12. It is important to list all sources including alimony, child support, side jobs, etc. This figure will set the cap on your total budget.

Create a list of all your monthly expenses. If an expense occurs less frequently, simply pro rate it to fit a monthly format. Be sure to include such expenses as: housing, food, transportation, utilities, entertainment, etc. It is wise to track your spending for a full month during this stage of budgetary planning. Save your receipts and each evening write down your expenses for the day. This is the best way to gain an accurate reflection of actual expenses.

Determine if your income covers all of your current expenses. If the answer is no, then expenses need to be reduced.

Adjust expenses. This can be done in a variety of ways. Depending on the amount of the shortfall, it may be a simple matter of reducing some discretionary spending, such as entertainment, or food.(i.e. the number of times you eat out in a given month) If the deficit is larger then it may be a matter of downsizing your vehicle or your living arrangements. If your income covers all of your expenses then this is still a good opportunity to trim some of the fat off of your spending habits. This can help free up extra money for a variety of reasons ranging from, college education for the kids, to a nice anniversary trip with your wife.

Add new categories if necessary. Three areas that are often overlooked are 1) debt reduction 2) retirement savings and 3) emergency savings. An emergency fund will ensure that there is an adequate amount available to cover an unforeseen event (i.e. the car breaks down) should it arise. This will prevent the use of credit which can quickly break a personal budget.

A major advantage of living on a budget is that it relieves a great deal of financially related stress. It's always fun to spend money at the time of purchase but it is not nearly as much fun when the bill comes do. When this happens, some people resort to using credit cards to pay off other cards. Other times people pay their bills and then choose to obtain "payday advance loans" to get them through until the next check. Both of these situations cause a vicious cycle of debt and growing interest. A budget can help ensure that an accumulation of debt is prevented and money will be available throughout the entire month.

Another advantage associated with budgeting is that it allows an individual to regularly place money into savings plans. This will allow the person to enjoy a comfortable retirement when that stage of life rolls around. It will also provide a financial cushion to cover any emergency situations that may arise.