Budget for Your Peace of Mind

Are your finances keeping you up at night? You're not alone. Almost three-quarters of adults say money has them feeling stressed, according to the American Psychological Association. That's not surprising, especially in today's economy with skyrocketing energy and food costs, tepid investment performance and rising unemployment rates.

The remedy? Tackle that tension with a budget.

If the mere mention of the "b" word raised your blood pressure, take a deep breath and consider this: Budgeting is simply a way to make sure you have enough money to reach your goals.

A budget isn't constricting. It sets you free. When you have a plan, know how much money you have and where it's going, you don't have to worry about it. Knowledge really is power.

Here are the five basic steps to building a budget that'll put your mind at ease. It'll take a bit of time and effort, but it's well worth it.

1. Take inventory

Before you can make a plan, you need to know how much money you have and where you spend it.

For at least one month, track all your expenses. And not just the biggies like your rent payment and grocery bill. Make a note of smaller purchases, too, especially cash purchases that may not show up on your bank or credit card statement. You can carry a small notebook to jot them down, or collect every receipt and toss them in a shoebox when you get home to sort through once a week.

You should also make note of large annual expenses, even if they don't happen to fall in the month you're tracking. For example, if you usually pay $600 every six months for car insurance, jot down $100 this month for that cost.

2. Make a diagnosis

At the end of the month, examine your spending habits and look for red flags. Organizing your purchases into categories -- such as housing, transportation, clothing, entertainment, food, dining out, etc. -- will help.

This exercise can be eye opening. When I did this with my expenses, I found that I was spending almost as much on "quick trips" to the grocery store each month as I was on my main weekly shopping trip. You may discover you've been spending too much time at the coffee shop, or that you didn't save a single penny for a rainy day.

(Or you may find that your finances are doing just fine and that you had no reason to worry. Good for you.)

3. Put your eyes on the prize

4. Cut costs and boost income

This isn't so painful when you stay focused on your goal. Look at the problem areas you identified in step two and find ways to fix them. For example, if you found that dining out was eating away too much money, take your lunch to work instead of eating at restaurants. That act alone could save about $100 a month.

That's money you can use to pay down debt, save toward something you want or use as a cushion for rising gas and food costs. Almost everyone has fat they can cut from their spending. See Save Money on Practically Everything for simple ways to trim thousands of dollars of dollars on food, utilities, entertainment, investing and more.

One problem you may need to address: You simply need more money. Start by checking your tax withholding. If you receive a tax refund every year (and most of you do), file a new W-4 form with your employer to get you more money each month, instead of in one big chunk when you file your tax return. Use our easy withholding calculator to help you figure out what to put on the form.

If your expenses and goals drastically exceed your income, you may need to take more dramatic action. For example, getting a part-time job on nights or weekends, selling your car and using public transportation, getting a roommate to cover housing costs, moving to a cheaper city or even moving back in with Mom and Dad. (Find out more ways to live rent-free.) Again, remind yourself of your goal to motivate yourself to do the right thing. Sacrifices today can add up to big rewards tomorrow.