As with any other area of your life, it's pointless to start down a financial path if you don't you have some idea of where you want to end up. What is your reason for creating a budget? Are you trying to pay off your debts? Save for your kids' college education? Put money away for retirement? When you have a concrete goal in mind, it's a lot easier to follow a routine, to stick with the process, to see things through to the end. It also helps you visualize your progress in a way that encourages and motivates you to keep going. Remember, creating a budget is not a one-time activity -- it's something you have to revisit monthly in order to reinforce the habits and behaviors that will get you where you want to be. So make a list of your financial goals for the next 6 months, 1 year, 5, 10, 25 -- all the way through to old age. But don't spend a lot of time worrying about feasibility. If your goal is to be debt-free in a year, try not to focus on all of the reasons you won't be able to make it by that deadline, or you will end up derailing yourself. Where there's a will, there's a way!

Track Your Expenses

Having a goal is great, but how can you take steps to reach it until you know exactly where you are starting from, right now? Most of us don't have a clue where our money goes -- credit cards and ATM's make it easy for cash to just slip through your fingers. That's why it's so important to keep a thorough record. Begin with either a sheet of legal paper or a spreadsheet program, and create 12 columns -- labeled January through December. Each row will represent a different living expense -- groceries, gasoline, rent, vacations, Starbucks coffee on the way to work. You'll have better luck remembering everything that you spend money on if you think according to categories. "Automobile" would include gas, repairs, insurance, and taxes -- while "grooming" might be divided into clothes, makeup, haircuts, and facials.

First, look at your static expenses -- things that cost the same amount every month, like rent and your car lease and student loan payments. Of course, these expenses are not completely "static" in the strictest sense of the word. You can reduce your rent or mortgage payment by finding a less expensive house -- and you could increase your loan payments to get rid of the debt faster. But for now, just itemize your regular monthly costs. Next, you want to evaluate variable expenses -- those costs that fluctuate from month to month. Groceries, entertainment, utilities, and clothing all fall into this category. The great thing about variable expenses is that you control (at least to a certain extent) how much of your budget these items eat up. It's much easier to decide that you will eat out less in a month than it is to move! But some of these costs come in large and unexpected chunks -- like car repairs and medical bills. So you might need to go through your last 12 months' credit card and bank statements to get a clear idea of how much daily life truly costs you. And don't forget about those expenses that are paid only intermittently -- like insurance or taxes. Tally these sorts of expenses and divide the total by 12, to give you a better idea of how your costs spread out over a year's time.

Root Out Money Leaks

If you feel as though you are forgetting something, you probably are! I guarantee that you will not remember every expense, no matter how hard you strain your brain! Think about all of the things that you buy throughout your week without really paying attention -- snacks at work, a magazine when you stop for gas, that cup of coffee on the drive in every morning. These kinds of  expenditures can eat a hole through your budget without you even realizing it.

And don't forget about the expenses you are racking up because of financial disorganization -- interest on your credit card debt, late fees because you forgot to return that movie on time, overdraft charges because you didn't balance your checkbook. All of these fall into the category of unconscious spending. You just do it because it's a habit. And although you think that a dollar here or 50 cents there is insignificant, it can really add up. If you're being truly honest about your budget, you need to include (and hopefully work to eliminate) these "money leaks."

For one month, keep track of every penny that leaves your hand, in the form of a check or cash or a credit card transaction. This may sound like a huge challenge, but you can do it! Make it convenient -- my husband stuck a small pencil and piece of paper in his wallet so he would be reminded to record a note every time he made a purchase. You will be stunned when you see where your money is really going. My husband had no idea he was spending almost a hundred dollars a month on that morning coffee (am I picking on Starbucks too much?) -- and this information brought about an immediate change in his morning routine (he now buys Starbucks ground at the grocery store and makes his own at home for about 1/10 the cost.) What's your vice -- eating out when you are feeling lazy? Buying every new CD or magazine that comes out? A daily paper that you never quite get around to reading? I'm not suggesting that you completely eliminate these habits -- just that you decide how often you can reasonably afford to indulge and still reach your other financial goals.

What Comes In And What Goes Out

It's also important that you have some idea of the debts you owe. Did you figure these payments in your budget with your other expenses? If you are only counting the minimum monthly payment, you will never get anywhere. After we get your budget in order, the goal is to pay at least double the minimum amount on the credit card or loan that has the highest interest rate -- then tackle the next highest after the first balance is paid off. And if you can afford to pay more than double, go for it. You aren't really free to start working on other financial goals until you know you are without liabilities.

Here's another important question (and one that few people can answer truthfully) -- do you really know how much you earn for a living? The tendency is to quote whatever is printed on your employment contract -- to say, "I make _____ a year." But after taxes and Social Security and any other items that are deducted from your check, what are you actually bringing home? Take a minute to really examine all of your sources of income and calculate an honest total -- you can't have a realistic budget without it!

What's The Verdict

Comparing income to expenses, how does it look? If you came out in the black, congratulations! How much do you have left over? Regardless of how small or large the amount, start stashing a large portion away where you won't touch it. Of course, the choice of vehicle will depend on your financial goals -- investing for retirement will involve less liquidity and more risk than just saving for next year's vacation. You will probably want to set up several different accounts -- an emergency fund (containing 6 months' worth of living expenses in case something happens) and a long-term retirement savings, as well as short-term investments for other purchases and projects. The main thing to remember is that you should build these nest eggs into your budget just like a bill -- and take care of these long-term responsibilities first, before other discretionary expenses.

If you ended up in the red, we need to talk. The first step is to look at spending which can be reduced or even eliminated. Start by examining those "spending leaks" -- if they give you pleasure and satisfaction, dandy. Certainly late fees and interest charges don't fall into this category! But you can still overdo a good thing. Ask yourself if eating out 4 times a week gives you 4 times more enjoyment than doing it just once. And could you get as much satisfaction if you cooked a good homemade meal? Is the ridiculous mortgage on that 10,000 square foot house worth it? Or could you be just as happy (or even happier with less financial stress) in a place half the size? Also look for convenience expenses -- things that we spend money on because we are overwhelmed, too busy, or just worn out. Perhaps by re-evaluating how you use your time, you might discover that many of these expenses are just symptoms of misplaced priorities. When you arrive at a place where all of your spending decisions are deliberate ones, you will find yourself several steps and quite a few dollars closer to a balanced budget that allows you to reach all of your financial goals.