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Making a budget is an important way of staying in control of your finances. You will be able to work out how much you can really afford to spend, save and service any debts.

Where to start

First draw up a list of your income and outgoings. It is best to calculate this as an annual figure because monthly expenditure can fluctuate. For example, you spend more in the run-up to Christmas than you would normally.

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It is important to be thorough and honest when listing your outgoings. Start with the bills, including rent or mortgage payments, gas and electricity, council tax, water, phone and broadband, insurance and car expenses such as tax and MoT. Do not forget any debts or child maintenance payments.

Then think about everyday expenses, such as food, household items, petrol, pet food, cigarettes, alcohol, entertainment, eating out and so on. Include the average cost of any holidays and even add up what you are likely to spend on birthday presents and cards. Finally, include an estimated amount for unexpected costs, such as new furniture or car and household repairs.

After working out your total outgoings for a full year, calculate your monthly or weekly expenditure by dividing by 12 or 52.

Now for the simpler part: a list of all your income. This may include earnings, interest on savings or investments, benefits or tax credits, rent from lodgers or family and so on.

Work out your total income for a month or week, then take away the expenditure to work out whether you have any spare cash.

If you have money left over

If you have anything left at the end of the month, put it in savings or investments rather than leaving it in your current account or frittering it away.

The first place to put any excess funds is an individual savings account (Isa), which allows you to save up to £3,600 a year without being taxed on the interest. If you have already used your Isa allowance, put the extra money in a best-buy savings account. To find the best deals, go www.timesonline.co.uk/savings. It is vital to build up a rainy day fund (preferably at least three months’ wages) for emergencies, and you may also want to save for a new car, house deposit or other large purchases.

Depending on your age and circumstances, you could also put excess funds towards your pension, overpay your mortgage or clear debts such as student loans.

Do not forget that even if you are in the black, there will still be ways to save money and ensure that you have even more cash left over at the end of the month. Now is a good time to review expenses such as mobile phones or utilities and make sure that you are getting the best deal.

If you are spending too much

If your outgoings exceed your income, take action immediately to avoid falling into debt. Do not be tempted to take out a credit card or personal loan to fund your lifestyle. You need to think carefully about how to reduce your spending and boost your income.

First, look at ways to save money. Can you switch utility, insurance or phone providers to get a better deal? Can you spend less at the supermarket? Can you have your heating on less? If you are in the red, you need to cut down on everything apart from the bare essentials. You must keep asking yourself “what can I afford?” rather than “what do I want?”.

Set yourself maximum targets for expenditure based on what you can afford. For example, £50 a week on food, £10 on alcohol. But then do your utmost to stick to the target. You could even take out different bank accounts for each area of expense to help you to avoid overspending.

You also need to think about how to raise additional funds. Find out if you can claim any benefits or tax credits, and make sure that everyone who lives with you and earns money is paying their share. If possible, consider taking on extra work.

If you have debts that you cannot afford to repay, you must deal with these immediately. Get in touch with a debt charity such as National Debtline, the Consumer Credit Counselling Service or your local Citizens Advice Bureau for free advice. They can help to negotiate with creditors and possibly freeze interest charges while you work out a repayment plan.

Keep your budget updated

Finally, your income and outgoings will fluctuate over time, so it is important to review your budget regularly and check that your calculations are accurate.

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