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Creating a household budget is hardly a fun exercise, but it is a necessity, especially in these tough economic times. Determining where monthly paychecks go can help rein in bad spending habits and create new, fiscally friendly ones.

To start, financial planners suggest you gather a year’s worth of bills and loan payments to create a complete picture of your expenses. Make a list and assign each to a category, such as groceries, utilities, mortgage, auto and entertainment. Be sure to note when your spending increases throughout the year, such as around holidays or annual vacations.

Next, determine fixed and variable expenses. Fixed expenses have little to no change each month, such as mortgage, car payments or cable bills. Variable expenses change monthly—groceries, gas or personal expenses such as morning coffee runs.

Once you’ve sorted your expenses and calculated a monthly average, figure out your monthly income by checking your pay stubs and other sources of revenue. Ideally, your expenses should not be greater than your income. Your ultimate goal is to create a “zero-dollar budget” to see exactly where each dollar of your income goes. The money left over should be put into a savings account or used to pay down credit card debts.

When you’re through with this exercise, look for ways to build an emergency fund. Consider putting aside enough for three to six months’ living expenses. If this number is too daunting, set a goal for smaller amounts, like $1,000 to 3,000.

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