When you come to the realization that you’d like to create a budget, it may be difficult to know where to start. For a classic budget, the best way to go is to write down all of your income and expenses over the course of a few months. You should try to capture where each and every penny goes. The more specific you can be, the better.

Once you have the raw data, you’ll need to decide how to organize it. You can use pen and paper, but using a computer is much easier. I use Microsoft Money, but there are many other comparable programs available.

Creating your budget is as simple as adding your income and expenses into the program and categorizing each item. You can use predefined categories, or create custom ones that are applicable to your situation. You can also add one time expenses, such as vacations or major purchases. You can also setup recurring expenses that happen on an infrequnt basis, such as your yearly car registration.

Ideally, you would have tracked a few months worth of expenses before creating your budget, but you can certainly start by estimating what your expenses will be. You can then edit your budget as you start to get a better idea of the actual amounts that you’re spending. As time goes by, and your budget is based more and more on actual income and expenses, it will become more accurate.

With an accurate budget, you’ll be able to get a sense of your cash flow on a monthly basis. This is basically the extra income that you have once all of your budgeted expenses are paid for. You can then adjust your budget to allow you greater spending in a category to use up this surplus, or create a savings goal to apply the money towards. If your budget shows a negative cash flow, then you can adjust your spending accordingly to make up the difference.