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Q&A: What are the basic steps to building a budget?

With the increase in social security taxes taking a bite out of everyone’s paycheck, most of us are reducing expenses and reworking our personal budgets. It’s tempting to begin scrimping on the necessities, but you must continue to allot enough money for the most important items in your budget – housing, transportation, food and utilities – and still find ways to spend your money as wisely as possible.

We all need a place to live, food to eat and transportation to and from work. So make it a priority every month to pay your mortgage or rent; to make your car payment, maintain your vehicle properly and pay for car insurance; to pay for heat, water and sewer and other utilities; and, of course, food.

In the wake of increased taxes, however, look for smart ways to reduce these expenses.

For example, there is a lot of competition among natural gas providers, so look for ways to reduce your heating bill by shopping around for the best price.

READ: How do I stick to my New Year’s resolution to manage my finances?

When buying food, purchase enough to cook all of your meals and bring your lunch to work. You will save hundreds, even thousands, of dollars over the course of a year by eliminating the purchase of coffee or lunch at restaurants near your workplace and limiting dining out on the weekends.

The next priorities are your health and taxes. Set aside money to buy health insurance, which includes medical, dental and vision. And, if your medical plans allow you to allocate tax-free dollars for out-of-pocket expenses, often referred to as flexible spending accounts, make sure to take advantage of this benefit.

Next, budget money to pay for any taxes that are not deducted from your paycheck or monthly mortgage payments. For example, some people choose to pay their property taxes near the end of each year rather than have them included in their monthly mortgage payment.

Now that you have budgeted for all necessities, put a financial umbrella in place to protect you, your property and your family, in case of a major accident or death.

READ: How can single parents make ends meet?

My financial umbrella includes homeowner’s insurance and a home security system. It also includes disability insurance, which will help pay bills if I should have a medical accident that forces me to miss work for several weeks or months.

Finally, if you have a spouse or young children, you need to have life insurance and a will.

Next, set aside money for savings, which includes an emergency savings fund, retirement and a third category for a specific goal, such as a house or your child’s college education.

Once you have funded your savings account, the next priorities are clothing, internet service and other technology expenses, such as mobile phones and cable television. Many people now see mobile phones as a necessary expense to conduct business; if you fall into this category, make certain to budget carefully for other technology needs. For example, you may be able to live without a land line or cable television service.

The least important items in our budget are those that may hold the most interest: the cost of movies, concerts, ball games and other entertainment, including travel and vacations. We all want to enjoy life, so if you have the means to do so, make certain to build the cost of these items into your budget — but only after you’ve allocated money for items that you truly need.

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