Creating a budget doesn't mean you can't spend money, so don't stop reading yet. Most people cringe at the word "budget," but it really can be a comforting tool to ensure your money is in order. Essentially, a budget is a plan for how you will spend your cash. It can help you understand where your money goes--not to mention how to streamline your spending to save a little extra.

The first step in creating a budget is determining your income and how much money you actually have to work with. Take into account your salary or hourly wage. If your schedule varies and you don't get a consistent paycheck, use an average of the last three to six months. It's okay to estimate, but try to keep the average realistic and as close as possible to the actual amount you will bring in. Don't forget to include:

• Odd jobs and sporadic income: If you know you will sell one or two textbooks every month, include that in your income.
• Rent from roommates: If you own a home and charge someone else for rent, consider that income.

Do not count available spending limits on credit cards as income. A good budget should get and keep you out of debt--not put you into it.

Now that you've determined how much income you have to work with, it's time to figure out your expenses. Start by making a list of all your fixed expenses -- bills or payments that are the same amount (or close to it) each month. Don't forget:

• Rent
• Mortgages
• Loans (education, auto and others)
• Heat, electric, water, and other utilities
• Cable TV and Internet service
• Insurance (health, auto, etc.)
• Groceries
• Gas, fares or other transportation expenses
• Childcare
• Pet expenses
• Credit card payments
• Savings

Your fixed expenses tell you a lot about how you spend your money. They can be a big indicator for the rest of your budget, and determine how much you have left to spend or save each month.

Determining how much you spend on variable expenses (amounts that change each month or that you don't get a regular bill for) can be a bit tricky. You can't anticipate everything, but there are some variable expenses that you can plan for and control. Consider hair cuts, oil changes, planned vacations and taxes. If you're not sure how much to plan for, start with your previous spending habits and make adjustments from there.

For areas that may be harder to predict, try this: Make a list of irregular expenses you might encounter in a year (or encountered last year), add them all up, and divide it by 12 months. This can help determine an amount to include in your budget and set aside each month for variable expenses. 
 

You now know your income, as well as your fixed and variable expenses. Take your income and subtract the expenses.

• If you get a negative number, it's time to go back to the drawing board. Start with your variable expenses and allot yourself a bit less in non-essential categories like entertainment and meals out. Next, take a look at your fixed expenses. If loan or credit card payments are requiring a large chunk of your budget, call your creditors to see if you can lower your interest rate or monthly payment. Consider consolidating. Still in the red? Start thinking about moving somewhere cheaper or getting a less expensive car.
• If you get a positive number, you have successfully budgeted for your anticipated expenses. However, there can still be room for cutbacks in order to use your money more efficiently. Consider increasing the amount you pay on debt like credit cards and student loans. This can also be a great time to pump up your savings plan each month.

Tracking your expenses effectively is the key to staying on top of your finances. There are several ways to keep records.

• Websites: Check out sites like mvelopes.com and buxfer.com that can help you get organized, set up a budget, and track your spending and saving. Choose one based on your needs, safety features and usability.
• Software: Personal finance software can be expensive, but some programs may come pre-installed on your computer. If you're interested, check out microsoft.com/money and quicken.com to download a free trial.
• Other tools: Check with your financial institution. There may be guides, resources, or even online tools such as an account aggregator, which collects and organizes your bills to help you track your spending and budget.

The last step in the budgeting process is simple: be flexible! Don't get frustrated if you have to keep adjusting the numbers -- it's a part of the process. You might not get everything to fit perfectly the first time, and even small changes in your income or expenses can force you to adjust everything else. Changes like taking on a roommate or getting married may require bigger adjustments.

Sources: money.cnn.com; chicagofed.org; investopedia.com; kiplinger.com; wachovia.com; census.gov; moneycentral.msn.com; ncua.gov