Start the New Year With a Powerful Personal Finance Tool

I am an unabashed, unapologetic, unceasing believer in the power of a budget. I know that many people cringe at the mere mention of the word. They think it'll be restrictive, constraining, and, heaven forbid, work!  It will take some work -- that's for sure. But the benefits are so great that I believe everyone who deals with money -- rich or poor, young or old -- should use this much misunderstood, much maligned personal finance tool. I also believe, as counterintuitive as it may sound, that using a budget actually leads to great financial freedom.

In so many areas of life, feedback makes the crucial difference between success and failure. If you tried driving a car without all the feedback provided by the various dashboard gauges, you'd probably get lots of tickets and frequently run out of gas. A budget is a financial dashboard, giving us the feedback we need to make sure we're living within our means while fueling (sorry!) the accomplishment of our goals.

Here are the four essential steps to setting up and using a budget.

Estimate your current income and expenses. If you've never used a budget before, I recommend that you start with a paper & pencil version like this Cash Flow Plan (you'll find the link under "Getting Started With a Budget").  Fill in the "Now" column for each category as best you can.  You may have no idea how much you're spending on entertainment or groceries. That's okay. For now, just take an educated guess.

Plan your future income and expenses. What you put in the "Goal" column for income will probably be the same as what's in your "Now" column, unless you're expecting a raise sometime soon.  For the rest of the plan, take a look at my recommended monthly spending guidelines (found at the link mentioned above).  The recommendations are not cast in stone, but they may help you see if you are wildly off in this or that category. These are ideal plans, meaning they assume you have no debt other than a reasonable mortgage.  If you have a car loan or other debts, you'll have to spend less in other categories.

Keep track. This is the part most people especially don't like. But if a budget is ever going to go from theory to reality, you have to know where your money is actually going each month. Get in the habit of keeping receipts or writing down what you spend throughout each day. Then, at the end of each day, enter what you spent on your Cash Flow Tracker (found at the link mentioned above).

Review. At the end of each month, total up what you spent in each category and see how it compares with your goals. If you're over, see what happened.  Is your budgeted amount simply unrealistic? Should you make an adjustment in the "Goal" column of your Cash Flow Plan? Or, do you need to get more proactive about hitting the number?

With the New Year just around the corner, right now is the ideal time to get in the habit of tracking your spending. You may have to take this on faith, but eventually I believe you'll see why I believe a budget is the single most valuable personal finance tool available.

What questions do you have about budgets? If you use one, what issues sometimes trip you up  If you have never used one, what's the biggest roadblock?

Matt Bell is the author of Money, Purpose, Joy (September 2008), Money Strategies for Tough Times (April 2009), and the upcoming Money & Marriage: A Complete Guide for Engaged and Newly Married Couples. He teaches a wide variety of workshops, including the MoneySmart Marriage workshop (www.MoneySmartMarriage.net) at churches, conferences, universities and other venues throughout the country. To learn more about his work and subscribe to his blog, go to: www.mattaboutmoney.com.