A budget is a plan for managing your incoming money (income) and outgoing money (expenses). A good budget shows you how much of your income goes toward essential expenses, savings and debt payments. It also helps you track your progress toward financial goals like building an emergency fund, paying off debt or saving for a big purchase.

To create a budget, start by adding up all your monthly income sources: wages, salaries, tips, Social Security benefits, investment income and more. Next, list your regular expenses: rent or mortgage, utilities, insurance and car payments. You can also include expenses that are fixed for a certain period of time, such as a gym membership or a home improvement project. Finally, list variable expenses: things that may change from month to month, such as groceries, dining out and entertainment.

Once you have a complete list of your expenses, separate them into categories of needs and wants. Typically, items considered necessities are those you can’t live without, such as food, water and electricity. Wants include things you would like to have, such as restorative spa visits or organic groceries. Items that fall into the “should have” category include minimum required debt payments and savings for future needs, such as a new car or a vacation.

Next, identify any spending habits you can change to help you reach your financial goals. For example, if you spend too much on coffee and takeout, consider making a meal at home instead. As you make changes, remember to update your budget throughout the year. For example, if you get a raise or are making progress paying down debt, increase your savings and reduce any unnecessary spending.