A Guide to Better Budgeting in Three Months

NEW YORK – Maintaining a real budget, not one that you pretend to keep in your head, allows you to sleep at night without agonizing over how you are going to keep up with ordinary expenses and pay for the unexpected. If you don't have this all-important personal balance sheet, start one now. In just three months' time, you can win the battle of the budget.

Here's a three-month budgeting plan for reducing overspending, freeing up money for savings and building up cash reserves:

Month 1: Figure out what you earn and what you spend

Add up your salary and any other money you've received in the past year, such as dividends, rents and bonuses. Then examine how you've spent your money. Determine your routine monthly expenses as well as sums that you pay at irregular intervals like insurance premiums and gifts. If you find that you still can't account for some of your spending, keep a journal and jot down expenses as they hit you for one week.

Month 2: Break down your expenses

Calculate what percentage of your income goes to each of your expenditures, from groceries to commuting costs and club memberships. Ideally, you want to allocate no more than 65% of your take-home pay for regular monthly expenses, like food and mortgage payments. Allow 20% for occasional outlays on things like clothes and household repairs. And put an additional 10% away for irregular expenses such as insurance premiums and property taxes.

You're in good shape if 10% or less of your after-tax income (not including mortgage payments) goes toward debt.

Month 3: Curb spending, pay off debt and start saving

Re-evaluate your income and expenses and make changes so that you can live on your budget -- realistically. If you find that you're paying 15%-20% of your annual income on debt, you're in trouble. Figure out what indulgences and luxuries you can sacrifice and allocate as much money as you can each month for debt repayment. But don't get carried away! Everybody needs some luxuries, so you and each person in your family should be allowed at least one indulgence.

Once you've created a workable budget and conquered any debt problems, start saving a fixed amount each month. Put that cash away as regularly and as faithfully as you meet your mortgage payment or rent.

Remember: Successful budgeting depends on being neither too rigid nor too loose.