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The key to managing your finances effectively and avoiding debt is to draw up a simple budget – and stick to it. The word budget may make you think of the dull facts and figures announced by the Chancellor of the Exchequer. But it is just a way of balancing your books and making sure you only spend what you can afford. It should not take more than about 20 minutes and you will be well on the way to getting a gold star for money management.

Start with a blank sheet of paper divided into two columns. On one side, list details of your monthly income. Apart from your salary, this should include any benefits such as tax credits or child benefit. If you have joint finances, include your partner’s salary

Be honest

In the second column write down all your monthly outgoings. Unless you are a hermit, this list will inevitably be a lot longer than the other. But don’t panic. It is important to be honest about your and writing everything down to start with will help you spot any unnecessary spending.

List essential commitments such as your mortgage or rent, council tax, ground rent and service charges, buildings and contents insurance plus TV licence and utilities. Life insurance, pension contributions and any maintenance payments should also be included. If you have a car, calculate how much you need to put aside each month for insurance, MOT, tax and maintenance. Any credit card, loan, hire purchase or second mortgage repayments should be added here. Now add up the costs so you have a sub-total for essential spending.

Next comes everyday spending. If you have children then the costs of their care plus clothes and toys should be listed. Include a realistic estimate of your monthly food and toiletries bill plus public transport, parking and petrol costs. Money spent on leisure should cover gym membership, newspaper and magazine bills, alcohol, CDs, books and DVD purchase or rental. Don’t forget those trips to the hairdresser and beauty therapist. Add details of take aways, eating out and bar bills including any food bought at lunchtime during the working week. If you smoke then write down the amount spent on cigarettes and if you have pets don’t forget their food expenses. If you have a passion for clothes or electrical gadgets and retail therapy forms a regular part of your spending then include details here. Then add up the everyday spending costs for another sub-total.

Occasional costs should be things that may only happen once or twice a year but still have to be paid for. Think birthdays, weddings, Christmas, and holidays. Decorating, furniture and gardening costs should appear here plus any dentist and optician costs. As before, add up the outgoings for a sub-total.

The big picture

Next add the three sub-totals to form a grand total and deduct it from your total income. You will now have a clear idea of whether your spending exceeds your income and by how much. With any luck, you will be living within your means. If you have money to spare then consider increasing any debt repayments or bumping up your savings. Aim to set aside some rainy day money. To build your emergency cash cushion, the rule of thumb used by financial advisers is to save the equivalent of three months’ net salary. So if your monthly take-home pay is £1,500 for example then aim to make regular contributions – of whatever you can afford – into a separate pot with a target of at least £4,500.

If you are not living within your means then it is time to look more closely at where you money goes and identify areas where you can cut back or make sacrifices. Unless you are living a Champagne lifestyle on a lemonade income, don’t panic and make sweeping changes. Instead, think about small ways to avoid unnecessary spending. The benefit of having separate totals is that you can set aside the essential costs and concentrate on others when you want to save money. Go through the lists of everyday spending and occasional costs and if you ask: Is this absolutely necessary?

Keep it under review

Reviewing your direct debits and standing orders is good financial practice, but it may also throw up things you had forgotten you were paying for. Research from Cahoot reveals that, as a nation, we waste an amazing £160 million every year on direct debits we forget to cancel. More than 80% of people continue paying for two or more months for a gym membership they no longer use. Women are quicker to cancel their gym membership than men – 19% of women cancel within the first month they stop using it compared to only 10% of men. Magazine subscriptions and mobile phone contracts are other items that go unnoticed. Ask your bank for a list of your direct debits and standing orders and make sure you review them regularly.

Preparing your budget is not a one-off. You should review it a couple of times a year and whenever your circumstances change. Managing your bank account online will also help you keep tabs on your cash.

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