What's a budget? A budget is an itemized listing of money that will come in (e.g., paycheck) and money that will be paid out (e.g., bills), over a specified period of time-usually monthly. In a personal or family budget, all sources of income are identified and expenses are planned with the intent of matching expenses to income. By creating and following a budget, you can have the money for the things you want.

Many people don't know where their money goes; all they know is it's gone too soon. Understanding where your money goes each month will help you develop a workable budget-the first step to financial security. If you're like most people, incoming funds are fairly predictable and easily documented-your paycheck and earnings on savings and investments. Money going out, however, is often harder to keep track of.

Start by making a list of all the items you spend money on each month: rent or mortgage payment, utilities, transportation and so on. Keep a daily record of all expenses. Document every purchase by getting a receipt for everything you buy, from the cup of coffee at the drive-up window on Monday morning to the movie tickets on Saturday night. You might want to keep a pocket notepad handy to record items. Note everything, including how you pay for things: cash, credit card, or check.

At the end of the month, make an expense record. First, list all of your expenses for the month, then think about items you pay less often (e.g., semi-annual car insurance payments). For items you pay just once or twice a year, divide the payment by the number of months it covers and write that amount on the monthly record. The Monthly Expense Record example that follows is a starting point. Some items on the list may not apply to you, and you may need to add others.

Using the monthly expense categories you've identified, try to reconstruct your expenses for the past few months. You may be surprised to find that you actually spent more money in those months than you can account for. You'll have a record of your credit card expenditures and your checks, but cash often seems to just disappear.

To get an even better picture, continue to record expenses for several months as you develop your budget. When you review your expenses, you'll probably see areas where you can reduce spending and increase your savings. You'll also get a good idea of which expenses you can't change. Understanding and changing your spending habits is the key to successful budgeting.

Now, take a blank copy of your expense record and label it "Budget." Instead of recording actual expenses, list what you expect to spend in each category. Start by listing constant expenses-such as rent or mortgage and car payments-that don't change from month to month. Then, use the information you've gathered over the past several months to set reasonable limits on the items that fluctuate, such as food and clothing, and those where you have the most flexibility, such as entertainment. Setting the limits isn't hard-the trick is living within them.

Once it's clear how your money is being spent, you can establish goals for saving money. Identify shorter-term goals for expenses such as home improvement or a vacation, and longer-term goals for things like a college education or retirement account. Write down exactly what you're saving for, and keep the list handy for extra motivation. Set up savings to be as automatic as possible, using direct deposit from your bank account or direct payroll deductions.

Start with the following chart, and personalize it to reflect your goals. Prioritize every item on the list and assign each a time frame- weeks, months, or years-to help gauge your progress. Ideally, you want to save at least 10 percent of your earnings, but no amount is too small. Even a dollar a day adds up to $365 a year.

Now compare your living expenses and your savings goals.While it's likely that the expense side will need some work, most who undertake this exercise find that a surprising amount of cash is unaccounted for. Ask yourself where you can spend less without drastically cutting your standard of living. And start a "pay yourself first" program by automatically setting aside an amount each month. This amount can then be increased if you get a raise or pay off an installment loan.

Here's a list of suggestions to help you cut corners and stick to your budget:

• Don't buy anything on impulse.
• Pay off credit cards each month; charge items only for convenience.
• Take your lunch and snacks to work. Avoid vending machines.
• Buy in bulk; use coupons.
• If you smoke, quit. It's good for your health and your budget.
• Entertain at home instead of going to a restaurant. Rent a DVD instead of a trip to the theater.
• Put some money into savings every pay period. If your company or bank has an automatic savings plan, sign up.

While all of these suggestions will help control expenses, many people find that it's actually easier to tackle the big items. Look at the big expenses in your budget and think about how you might cut them. Consider buying a less expensive car, for example (your car payment and your car insurance will be less). Or consider buying a used car instead of a new one.

If you've trimmed and cut, but still can't meet your savings goals, reevaluate your goals. Perhaps if you change the time frame you can meet the goal-delay the trip to Rome for a year or two, and take a less expensive vacation closer to home. Sometimes, though, you'll have to adjust the goal itself.

Once saving becomes part of your budget and spending routine, money will begin to accumulate. It's important to take advantage of financial tools that can help your savings earn interest and grow in value. The dollar-a-day savings example illustrates the power of compound interest. If you invest the $365 saved in a year in a high yield savings account earning a 4 percent return return or more, compounded daily, here's how that money will grow*:

*Note that the savings plus interest accumulations above do not reflect any tax liability that might be incurred. Returns mentioned are hypothetical, and are not intended to reflect any actual investments.

Financial experts are pretty much in agreement: save for retirement sooner rather than later. It's never too early to begin saving for retirement. If you don't already have one, consider establishing a tax-favored retirement account, such as one of the following:

401(k) Plans. If your employer offers a 401(k) plan, it may be one of the best retirement savings vehicles available to you, particularly if the employer matches all or a portion of your contribution. With a 401(k) plan, you may contribute up to a certain percentage of your gross income (i.e., total income before taxes).

Typically, 401(k) plans offer many investment choices, including a variety of mutual funds (e.g., stocks, bonds, money market). Some plans may allow investments in company stock and U.S. Series EE Savings Bonds, as well. You choose how to invest your savings, and you will have the option to change investments at specified times (e.g., quarterly). Typically, you may stop contributions at any time.

Earnings in a 401(k) grow tax-deferred until the money is withdrawn- usually after retirement-when you may be in a lower tax bracket. If you withdraw money before you turn age 591/2, however, you may be subject to a 10 percent IRS penalty. While early withdrawals are generally not permitted, some 401(k) plans permit withdrawals for "hardship" reasons, such as medical emergencies or college tuition. You do pay income tax on the amount withdrawn, and a 20 percent mandatory withholding generally is required from the distribution. Some 401(k) plans may also permit loans against your savings, as well.

403(b) Plans, also known as Tax Sheltered Annuities or TSAs, are retirement plans for non-profit organizations that are similar to 401(k) plans. Investment options in 403(b) plans include annuities and mutual funds.

Individual Retirement Accounts (IRAs), are sometimes called "traditional IRAs." IRAs were established by Congress to encourage people to save for retirement by providing tax advantages. Qualifying individuals may contribute up to $5,000 annually to an IRA. Tax benefits vary depending on your income and whether you contribute to other tax-advantaged savings plans (e.g., a 401(k) plan). In addition to possible tax deduction of IRA contributions, earnings in an IRA grow tax deferred until withdrawals begin. Your money must be designated as an IRA, in an approved account. You have a wide choice of investment options. Funds in an Individual retirement account are considered long term savings and, as with 401(k) plans, you may be subject to a 10 percent IRS penalty as well as to tax liability for premature withdrawals- generally before the age of 591/2. Consult a qualified tax professional for more complete information about Individual Retirement Accounts.

Roth IRA. Contributions to a Roth IRA are made with after-tax dollars. Generally, the structure and restrictions are the same as a traditional IRA, but Roth IRAs have income limits, outlined in the chart on page 18. Investments grow tax-free. Unlike traditional IRAs however, withdrawals made after age 591/2 are tax-free, which can be a big advantage. If you don't need the tax deduction you might get on a traditional IRA, a Roth IRA is probably a good choice if you qualify. You may incur a 10 percent penalty if you withdraw your contribution from a Roth IRA within the first five years after establishing a Roth IRA. Consult a tax professional for more complete information.

You can contribute to a Roth IRA if your adjusted gross income is below these limits:

Keogh Plans. Keoghs are retirement plans for people who are self employed. Rules covering contributions to Keogh Plans are more complex than those of IRAs. The amount you may contribute on a tax deferred basis will depend on your net earnings from your business. Contributions and all earnings accumulate free of tax until withdrawn, usually at retirement. In general, withdrawals prior to age 591/2 are subject to a 10 percent premature distribution penalty, in addition to ordinary income tax. Keogh plans may not authorize loans. Keoghs may be more complicated than IRAs, 401(k)s or 403(b)s, so consult a tax professional before setting up a plan.

Annuities. Annuities are financial contracts you make with an insurance company. An annuity may be deferred or immediate. With a deferred annuity, you put money in, and over time it accrues income and earnings; the payout occurs at some later date, when you may receive a steady stream of payments to supplement your income. Because insurance companies generally administer annuities, they can be set up to include life insurance benefits, such as a death benefit to a surviving spouse.

Immediate annuities are purchased with one lump sum payment and then begin an immediate payout. You receive payments on a regular basis (e.g., monthly), giving you needed income. You can generally choose to have the payouts guaranteed by the issuer for as long as you live or choose from a number of other payment options. All guarantees are subject to the claims-paying ability of the issuing insurance company.

Annuities can be a complicated investment, so discuss them with a qualified financial advisor to make sure you understand all the options and make the smartest decisions for your financial needs.

Free Publications

The quarterly Consumer Information Center Catalog lists more than 200 helpful federal government publications. Obtain a free copy by calling 888-8-PUEBLO or on the Internet at

Consumer Information from the Federal Government

The quarterly Consumer Information Center Catalog lists more than 200 helpful federal publications. Obtain a free copy by calling 888-8-PUEBLO; on the Internet at

www.pueblo.gsa.gov

Helpful Websites

The National Association of Investors Corporation

www.betterinvesting.org

This website offers self-guided courses on stocks and mutual funds as well as an archive of educational articles.

Internal Revenue Service

www.irs.gov

The IRS website offers detailed information about the tax implications of various investment and retirement plans.

American Association of Individual Investors

www.aaii.com

This website offers articles and guidance on stock investing, mutual funds, bonds, retirement planning and more.