Last week we talked about tracking your spending so you have a better idea of where your money is going. The main reason for doing that is so you can set up a budget that works.

I know when most people hear the word budget, they cringe. To some setting a budget is like going on a super restrictive diet where all of a sudden chocolate and bread and all the good foods of the world are suddenly off-limits.

But just like we all know crazy diets don't work in the long run, neither do overly ambitious or unrealistic budgets.

Setting Up A Budget That Works:

1. Figure out how much money you bring in each month. This includes paychecks from your full-time job and any money you make on the side. If you have a freelance gig include that. If you make any money from your blog (ad revenue, sponsorships, etc.) include that too.

Once you have that figured out, add everything up and you'll have the total amount of money you bring in each month.

If you're self-employed and don't bring in the same amount each month, this will be trickier. Take a look at the last several months to see how much money you've brought in on average. You'll need to take a bigger look at the year as a whole and identify any slow times where your revenue stream is smaller than normal so you can plan accordingly.

2. Once you know how much money you bring in, calculate your necessary expenses. Necessary expenses include things like rent and mortgage, groceries, the cost of transportation (car insurance, car payments, gas), utilities, etc. Basically it's the money you have to spend every month to stay alive and employed.

3. Subtract your necessary expenses from your income and the number you have left over is your flex spending money each month.

Flex Spending Money:

It's up to you to decide what to do with this left over money every month. Flex spending money is the money you put toward things like savings, retirement, paying off debt and having fun.

Yes, it would be unrealistic to think you're going to all of a sudden give up every happy hour or fun social event as part of your budget. And it's completely OK to still spend money on fun things or things that are important to you (like a gym membership), as long as you have the money for it.

Here's how I treat my flex spending money:

• Each month I put a small percentage toward an immediate savings goal. (My car is probably on its last leg and I know I will need a new one soon).
• I put another small percentage toward retirement savings.
• I put a very small percentage into an emergency fund.
• I use what's leftover as my "fun money" for football tickets, race entry fees, etc.

*I'm lucky enough to not have any debt right now. If I did, I would also be putting a percentage of my flex money toward paying that off as quickly as possible.

A note about fun money: When it's gone, it's gone. I'm not allowed to go into credit card debt to do something fun. So if I have several pricey events at the beginning of the month, I'm most likely skipping happy hour at the end of the month.

Homework:

Take some time this weekend to flesh out a budget. It doesn't have to be perfect. Consider it a first draft.

Figure out how much money you have coming in and what you absolutely have to pay each month to survive.

From there you'll have to decide what your financial goals are to figure out how to spend your flex money. This can be a bit of trial and error over the next several months. Experiment with different percentages and see what works for you.

Do you stick to a budget each month?