The first and most important step to setting up a budget is to find out where your money is going now. It is pointless to sit down and write out a budget with imaginary numbers such as "Groceries - $200" when you are actually spending $400 at the moment. This is just setting your self up for failure.
There are two methods. The first is the retrospective one where you dig out all your utility bills, credit card bills and cheque stubs and write down what you've spent over a set period and calculate your future outgoings, (budget), from this. I found this method to require a large block of time and to be highly inaccurate - there are always things missed, especially the small amounts of cash spent daily which can add up to a considerable amount.
The second method is the one I used, (and continue to use), which is writing down every cent I spend in a small 'spending' note book. Before you go shopping count how much cash you have in your purse. Get receipts for all purchases and for small cash transactions jot them down in your notebook. When you get home check that all cash purchases are in your book and that the change in your purse is correct, having deducted the amount spent from your total before you went shopping. Transfer all the amounts spent on credit cards/charge cards/cheques into your spending book also. It helps in the later analysis of your spending to be quite detailed with your description - e.g. Socks for Jim - $12.75. or Coffee and cake - $3.25, etc.
At the end of the week examine your notebook and transfer the amounts to a second 'budgeting' notebook. This should have a page per category, e.g. the items above would be 'Clothing', or 'Jim's clothing', (whichever would be most useful for you), and 'Eating Out'. Your categories will evolve as your budget evolves so keep it simple at first. I initially had one category for groceries. I then needed to find out how much I was spending on junk food so subdivided it. Since then I have separated out cleaning and bathroom products. The system that evolves will reflect your individual needs.
Each time you pay a utility bill or school fees or a doctors bill, etc. write this in your spending book as well. In fact all money that is spent in your household, including your spouse and children spending should be recorded.
When you have done this for 3-6 months you will then be able to set up a budget. By adding up all your spending in each category over, for example 6 months and dividing by 6 you will have your average spending for a month. That is the amount you will need to budget for each month if you do not want to receive an unexpected bill you cannot pay. If your total spending exceeds your income you know you are heading for disaster BUT you will also be in a very good position to see exactly where you are wasting money and it will be easy to cut back in those areas to allow for more in the essential spending catagories.
This may all seem very time consuming and hard but it can be fun, does become a habit, and can be quite obsessive when you can't discover where that 'missing' $15 went from your purse! Your little spending book will empower you to cut back or stop spending on non essentials so you can direct your money to more important things like debt elimination, paying off the mortgage or that holiday you thought you couldn't afford.
I have loads more to say on budgeting but you may have lapsed into a coma at the length of this tip already so I'll write again another day!
By Jo
Related: 
Creating a Budget
12/04/2010
Like ThriftyFun on Facebook
