The mere act of writing down -- on paper, in a spreadsheet, or on a website or app -- how much money you have coming in and how much is going out can make a huge difference when it comes to getting a handle on your finances.
It can help you avoid outright waste on things like late fees and overdraft penalties. It will help you identify where you could save money without painful cuts. And eventually it will enable you to spend less than you bring in so you can save for the future.
The short-term goal should be to reduce your spending to 90% or less of your income.
Here are six steps you need to take:
1. Add up your income. Tally up your family's monthly after-tax income. If what you earn varies depending on how many hours you work, add up your monthly total for a few months so you can calculate an average. But don't include dollars you can't be sure you'll receive, such as year-end bonuses or tax refunds.
2. Track your monthly spending. Make a list of all of your regularly occurring expenses: Mortgage or rent, utilities, insurance, child care, groceries, gas, car payments and access to phone, Internet and TV service are some common ones. Maybe you're also making payments on outstanding credit card debt, a student loan or a home equity loan. Add them all up to make sure the money coming in is more than what's going out each month.
3. Don't forget the little things. You may still do a sizable amount of spending that's hard to group into large monthly buckets -- money, perhaps, that you withdraw at the ATM and spend on day-to-day needs. Start tracking where that cash is going by keeping a journal of expenses for the next four weeks. You can use those results to extrapolate how much cash you're going through in a typical month.
4. Expect the unexpected. Often, "unexpected" expenses that can derail a budget aren't really so unexpected. Holiday gifts for your kids' teachers? Happens every year. Getting hit up with requests to buy stuff for fundraisers? You know they're coming. Since you can count on a parade of these recurring one-off expenses, project a conservative estimate for the year and include it in your budget.
5. Look for items to cut. If you're spending more than you make, creating a budget can help you find places to cut the fat. Maybe you could cancel a monthly subscription to an expensive gym or some premium cable channels. Wait until things go on sale to buy them, turn your thermostat down in winter and up in summer, and when you pay off your car, don't immediately trade it in for a new one.
6. Get high-tech help. A personal-finance program like Quicken, or website or app like Mint, has built-in tools that can help you create a budget. With many of these services, every time you make a deposit, write a check, pay a credit card bill or dispatch an electronic payment you are asked to assign it to a particular category. And if you bank online, you can download your payments and deposits directly from the bank rather than entering them by hand.