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How to Set and Maintain a Budget

Get your home finances in order by setting up a budget that works for you.

Budgeting isn't just about dollars and cents—it's about your priorities in life. Many people think that creating a budget means obsessively tracking where you've spent every penny. But all that tells you is where your money has gone. It doesn't tell you where your money should go in the future, and why.

A budget is a plan designed to meet your personal needs. Is getting out of debt your biggest goal? Give it plenty of room in your budget. Do you want to buy a house? Up your monthly savings target. Do you love to travel? You can choose where to cut back to fund a special trip. Your budget can be incredibly powerful because it serves as a guide for your ongoing financial decisions and ensures that you have enough cash for what matters to you.

Our budget guide shows you how it's done.

Set your priorities.
Your money should go toward what matters. What three goals are most important to you right now? Whether it's saving for college, renovating your house or losing weight—it all gets factored into the budget. So write it down.

Gather your documents.
Collect your recent pay stubs, credit card statements, bank statements, mortgage bills, utility bills, insurance bills and any other documents that show your income and spending history.

Calculate your monthly income after taxes.
To spend money, you have to have money. Write down exactly how much you make each month (after taxes, since that's an ongoing cost you can't control). If you don't know how much you earn, pull out those pay stubs! If you get paid twice a month, calculate your monthly income by doubling the after-tax number. If your income is irregular, look up your last tax return and divide what you reported by 12, or estimate the minimum you will earn over the next year and divide that by 12. Don't forget to include income from rent, dividends, alimony, tips or other sources. Write down the total.

Add back automatic deductions.
Does your employer deduct retirement contributions or health insurance costs from your paycheck? Add those back to your monthly income number —you'll account for them in your budget.

Create three buckets.
Decide how much of your income to allocate to each of three big categories: needs, wants and savings. Consider saving at least 10 percent of your income. If you don't have an emergency fund or retirement savings, bump that up to at least 20 percent. Allocate 50 to 60 percent of your income to needs like housing, food, education and transportation. The rest goes towards non-essential spending, like movies and new shoes. Calculate the dollar figure for each spending bucket.

Divide it up.
Now comes the heavy lifting. Create your detailed spending list. Keeping your priorities in mind, estimate how much money should be devoted to each expense in your "needs" bucket (rent, health insurance, gas, cell phone, etc.) and your "wants" bucket (clothes, cosmetics, dinners out, magazines). Only one rule applies: you can't budget to spend more than your monthly income.

Compare and adjust.
This is your reality check. Take a close look at the spending plan you just made and compare it to the documents you collected. If you left out a major expense, add it to the budget. If you allocated $100 to dining out but spent $600 last month, you need to adjust your food budget or cut back at restaurants. Also, consider where you're wasting money—every dollar you save on ATM fees can go toward that new sofa.

Set up your system.
It's one thing to create a budget and another to stick to it. Make it easier by automating as much as possible. Have your bank or employer deduct retirement savings each month or set up online bill paying. If you're more comfortable with an old-fashioned system like keeping envelopes for different expenses, set it up!

Check back in.
Your goal is to have your spending roughly match your spending plan. Once a month, spend 15 minutes reviewing your goals and your outflows. Adjust accordingly.

Once a year, revisit your priorities and your budget to make sure it still works for where you are in life.