How the budgeting process works

The budgeting process isn't that difficult. You need to know what you're spending and what you're making, and you have to make an effort to keep very close track of these things on a weekly and monthly basis. It's a worthwhile exercise though as a budget is usually at the heart of any financial success.

Although it does take some work, having and sticking to a good budget can bring you closer to your goals of financial security or of being able to live exceptionally well on a not-so-large income. When you know how to budget and make sacrifices, almost anything is possible!

First steps

The first step in the budgeting process is figuring out how much you make. If you have a salaried income, this process is simple, but if your income varies, you'll need to do a little more work.

While you might have a ballpark figure in your head right now, it's smart to dig out a few paycheques; see how much variance there is from month to month so that you can average out what you make to create a budget. Then, when your paycheque actually comes in each month, you can adjust your budget slightly to account for small differences.

Catching all those expenses

Next, you'll have to figure out all your expenses. This is where things can get a little tricky because you'll have some expenses that are set and several that aren't.

For instance, chances are likely that you pay about the same amount of money each month for things like your car, debt payments, your mortgage or rent and insurance, but your spending on groceries, clothes and eating out probably varies from month to month.

As best you can, figure out what you've been spending on everything for the past several months; chances are likely that you spend more than you should have on certain things, but having a set budget will help you curb those financially unhealthy habits.

Once you've got all your paperwork together, write out your budget, being sure that it accounts for every penny you make, even if some of those pennies will end up going into a savings account or paying off debt.

Review and revise

When you've set what you'll spend on each category of your budget, start tracking what you actually spend on each section; sometimes you may set your budget impossibly low at first, and sometimes you may give yourself more money than you need in certain areas.

As the months go by, you can tighten down your budget and adjust it to align with the way that you actually live. Your budget shouldn't be static – it will change as your situation changes.

You may also start to find ways that you can reduce your budget so that you can save more or pay off more debt, and you may also need to change your budget when new circumstances arise, such as a salary increase, a move that brings a new house payment, or a credit card whose debt is eliminated. Once you've got a few months of the budgeting process down, though, you'll be able to take this all in your stride.