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The word "budget" has practically become a dirty word in our consumption-crazy culture, but a monthly budget is an important component of a good financial plan. The reason its so important is because it provides a spending plan for your money before you spend it. When you have a budget, you can easily determine where youre spending too much and make adjustments to free up cash for important things like investing for retirement, building up a savings account, or paying off debts.

Pulling together a budget is pretty straightforward, but it does take a little time upfront to create and additional time on an ongoing basis to refine. But its well worth the effort! Before you can find a route to your destination, youve got to know where youre starting from, right? A budget can help you figure out where you stand financially now and play an important role in helping your reach your financial goals.

One thing I highly recommend before creating a budget is to take the time to really understand your "why". It can be tough to stick with a spending plan, so its important you have a strong "why" for creating it to begin with. Is it to take a trip at the end of the year? Pay for college? Build up your retirement? Take the time to understand what goals you want to achieve with the budget before you attempt to create one. The stronger your "why" the more likely youll stick to your budget even when its tough.

Step 1: List Your Expenses

Step one is to list out everything you spend on during the year, whether its electricity, gas, clothing, entertainment, etc. Be sure to include any overdraft fees or late charges youve paid as well. Check registers, bank statements, and credit card statements can be helpful for this. If you use software like Quicken or something similar, this could be as simple as running a report.

When my wife and I did this for the first time, we were blown away at how much we were spending in certain areas. Folks, this is a huge reason why this process is so important and valuable! Taking a hard look at what youre spending your money on is the first step towards getting your spending under control - which is the whole point of budgeting in the first place, right? One of the biggest reasons we often overspend is simply because we dont know how much were really spending on certain things.

Once youve figured out what youre spending your money on during the year, youll want to break everything down into a monthly expense. Some expenses are already paid on a monthly basis, such as the light bill, house payment, rent, etc. Simply figure out what you pay for these on average every month and include that amount in your budget for that particular expense.

If you have some expenses that are paid once or twice per year, such as insurance premiums, registration fees, etc., divide what you pay per year by 12 to arrive at a monthly amount and include that in your budget. By doing this, your budget will automatically "plan" for these expenses so that you have the cash on hand to pay them when they come due.

Cut Out Unnecessary Expenses

Once youve listed out your expenses and have them broken down into a monthly average amount, its time to figure out where youre overspending. Go through each expense listed and note which ones are mandatory and which ones are at least somewhat discretionary. Mandatory expenses are things like the light bill, gas, house payments, car payments, insurance, etc. You dont have as much control over those spending items (though it would be worth figuring out if theres a way you could reduce them). The discretionary stuff, like eating out, groceries, entertainment, etc., you do have at least some control over. These are the ones you want to target to see if you can reduce your spending. There may even be a few items youll want to stop spending on altogether.

Go through your list of expenses and set a reasonable budget for each, making sure that your total spending is less than or equal to your monthly income. Make sure to include savings as a budget item if thats to be part of your spending plan. Dont worry about making it absolutely perfect the first time around, though - budgeting is a process. You can always fine tune as needed in the coming months.

Put Your Budget Into Action

Once youve got your spending plan, its time to implement it. Keep in mind that this is often the most difficult part! Always keep in mind your "why" so you have the motivation to stick with it even if its tough. It may also not be bad idea to build in a reward for hitting or coming in below budget at the end of the month.

If your numbers end up being way off the first few months, dont give yourself a hard time about it. Simply refine and repeat until you have a budget that works for your situation. Make sure you monitor your spending throughout the month so you can make any necessary adjustments to meet your monthly budget number.

Conclusion

A spending plan can be pulled together in three simple steps: 1) list out your expenses, 2) trim the fat, and 3) put into action and refine as needed. When sticking to your plan becomes tough, dont forget why youre doing this! Visualize your financial goals and build a reward into your budget for hitting your numbers. Implementing and sticking to your budget will probably be tough at first - any worthwhile goal usually is. But once youve established the habit, youll wonder how you ever lived without a budget!