A critical first step to achieving your financial goals is to prepare and live within the restraints of a budget. A budget clearly defines what you will do with your money - how you will spend and allocate your income. Living within a budget requires self-discipline. It is a most critical element for living debt-free and achieving financial freedom.

A budget must balance reality with needs and desires. The reality is the level of income you have each month, the financial obligations you have already made, and the amount of expenses you encounter to maintain your standard of living. Our desires are our wants - the “stuff” which we feel we can’t live without. A good budget will focus our attention on our spending patterns for both the basic necessities and our wants. It will help us define our needs and wants, and prioritize our spending.

A basic budget should account for income and expense items:

You will find many other items to add to the above list for your budget. For a more precise understanding of your spending habits, itemize your budget in as much detail as you can.

After the budget is set and family members have committed to it, keep track of expenses and review your budget each month. From time-to-time adjustments to the budget may be necessary, but don’t lose sight of your primary goal - living within your income and setting aside an amount each month for savings.

Use the Budget Worksheet, or other budgeting forms available from the Internet to prepare your budget. Print out your budget with the actual spending amounts shown, and review it with the family each month.

Review Chapters 3 and 15 in Investing for Retirement - Surviving a Financial Tsunami.

Also, see Goal Setting, Spending and Debt, Cash Flow Analysis.