Effective financial planning requires that you create a plan. And that financial plan is called a budget. Major corporations have them, the government operates using a budget (sort of), and your home should have one. Budgeting can help you properly use your money, and give you direction as you save money, and as you spend it. Budgeting is a key to building wealth.

Step One: What you have to pay each month

Make a list of everything you have to pay each month. Bills, minimum payments, groceries, gas, etc. Put how much each thing costs next to the item. Also, figure out periodic expenses like insurance premiums and new clothes or activities fees for the kids.

Step Two: What you'd like

Making a budget isn't all doom and gloom. Make a list of what you would like to do with your money. Break your goals down into major goals (like saving to buy a house or an emergency fund) and little things (like dinner and a movie once a month). Make your list, prioritize it, and put how much you think you will need for each item. This list can also include planned charity donations.

Step Three: Decide to save

Figure out how much you can save each month. Creating a budget isn't just about living within your means. It's also about building wealth. You want to increase your net worth, so figure how much you can save each month (even if it's only $50 or $60).

Step Four: Figure out what you actually spend

Creating a budget might actually take a couple of months. You need to track your spending for at least a month and keep track of everything you spend your money on. You then should compare it to what you listed your expenses as in Step One. You should also took a long hard look at how often you waste money on things you don't need. Do you really need to rent movies twice a week? Or eat out once a week? Decide what's important, and cut back on things that aren't. Also, determine whether or not you are actually making more than you spend.

Step Five: Allocate funds for expenses from your income

Go through your lists from Steps One through Three and allocate the money that you make to each category. If you have periodic expenses (insurance is a good example), divide that into monthly increments. Open a separate checking account just for such expenses. That way you can pay an amount monthly into the account, and when it comes time to pay, the money is already there, and it does not seem like such a big expense. If you know that every year you are going to have to buy equipment and pay fees for sports participation, figure out the approximate cost (like $150), and divide it by 12. Every month, put $12.50 for the fees, and $100 (or whatever it is) for your car insurance, and whatever other periodic things you spend money on, into the designated checking account. As a bonus, you can open a money market checking account for this, and earn interest on the money that just sits there. But be aware that you will need to keep a minimum amount in the account.

Creating a budget can be even easier if you have personal finance software. It will keep track of your spending and then help you generate a budget and track how well you stick to it.