Follow these steps to put a solid budget plan into action.

Every great financial plan starts with a sound budget. If you’re trying to pay off bills or save for a dream vacation, a budget is your first step toward making your financial goals a reality. Follow these steps for setting up a realistic budget that gets you where you want to go.

1. Calculate expenses

Your first order of business is finding out exactly how much you’re spending each month. Do this by consulting your bank statements, receipts and financial files. Because some expenses are intermittent, such as insurance payments, you’ll get the most accurate financial picture if you calculate an average for six months to a year. Add up everything you spent for the last six to 12 months and then divide by the amount of months, which will give you your average monthly expenses.

Remember that being thorough when you add up expenses is important in creating a realistic budget. A forgotten bill really throws a wrench into your savings plan. When calculating your expenses, also factor in unexpected bills, such as unplanned car repairs. A good rule of thumb is to add an extra 10 percent to 15 percent. So if you’ve determined that you spend $1,500 a month, add $150 to $225.

2. Determine your income

Once you’ve figured out how much money you need to stay afloat financially each month, it’s time to determine your actual income. Besides your regular salary, get an accurate picture by adding in any extra funds that come your way throughout the year, such as cash gifts, sale of items online or via garage sales, and don’t forget other income sources like alimony, child support, interest, dividends and rental income.

3. Set savings and debt payoff goals

In order to determine realistic savings and debt payoff goals, you must find out if you have a budget shortfall or overage. Do this by subtracting your monthly expenses from your income. If you determine you’re making more money than you’re spending, congratulations. This amount can be earmarked for savings and to pay off debt.

But if you determine you’re spending more than you’re making, it’s time to do some cutting so you have something to save and don’t go further into debt. The best way to figure out where you can cut from your expenses is to track your spending and record every expense for a month. Seemingly insignificant items such as a cup of coffee add up over time. For instance, even if you spend just $5 a week on snacks, that adds up to $260 a year, which is not insignificant.

One you have a clear picture of where all of your money goes, be merciless in cutting expenses until your budget is in the black. Cut enough so that you have 10 percent to 20 percent of your income left over each month to add to your savings account. If you are unable to cut a sufficient amount from your budget, consider ways you can increase your income.

4. Record spending and track progress

The best way to stay on top of your budget is to record all of your expenses and income. Having to input expenses will cause you to think twice before splurging, and it’s especially satisfying and motivating to record when you’ve met a savings goal.

5. Be realistic

Aim for sticking to your budget most of the time, and you’re bound to reach your financial goals. Breaking your budget occasionally is OK, providing you get right back on track as soon as possible.

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