(Bloomberg Opinion) -- Now is a great time to develop a serious budgeting habit. 2021 might bring changes to your annual income. President-elect Biden will want to spend a lot to save the economy and lives from Covid-19, and  if your annual income is north of $400,000 you could see higher taxes. Those hardest hit by the K-shaped recession might get another stimulus check and more unemployment benefits. Look at your finances now so that you’re prepared for any changes.

A nation should run deficits; households should avoid them. People without budgets are more likely to fall into debt — and anxiety. But search for “how to create a budget” and most results are inadequate. Much advice focuses on those with no or low incomes, ignoring other barriers to budgeting like unexpected layoffs or expenses. And almost everyone underestimates the rewards of budgeting.

Budgeting takes effort and psychological steel. A personal budget won’t give you immediate gratification. It will not get you more money. But a budget will give you power. That’s the main payoff for the tedious trouble of maintaining a budget.

Lots of internet applications offer tips and motivation (Debt.org, The Balance) but I suggest budgeting free-hand. I started my budget with a piece of paper, a fresh cup of coffee, and some optimism. I eventually migrated it to my own Excel spreadsheet. You may be starting with debt hanging over your head. Put that debt, along with savings and wealth, to the side. Your budget is about cash flow.

Though most advice says start with income calculations, I say start with the most difficult stuff: Calculate what you want to spend and compare it what you actually spend. The effect is almost magical. If you are overreaching, you’ll need to change — suggest cheaper activities to friends, enlist family to exchange cheaper gifts. The point of budgeting is getting a fact-based life.

On lined paper or a spreadsheet, itemize your spending into 17 categories and create two columns: what you think you spend each month, and what you actually spend. (For annual expenses, divide by 12.) This should take you 25 minutes after you gather your records.

Here are the 17 categories:

  1. Housing, including rent or mortgage and property tax payments, utilities and home maintenance.
  2. Car expenses, including car payments, annual repairs and gas.
  3. Insurance, including home or renters’ insurance and any annual disability and life insurance premiums. (Don’t worry about health insurance if you get it through work; we are going to be looking at your post-deductions pay.)
  4. Groceries.
  5. Bare-bones necessities like clothes, haircuts (leaving out any extras like neck massages), medical copays and prescriptions. 
  6. Public transportation.
  7. Eating out. Count core costs only, like cheap lunches or takeout. 
  8. Minimum payments on student loans.
  9. Childcare.
  10. The 5% of your after-deductions salary that should go in a liquid emergency savings account. Emergency savings is for truly unexpected costs, like when a tree falls on your roof. 
  11. Essential travel to see relatives.
  12. Essential gifts for core people on birthdays and holidays.
  13. Basic entertainment, like date nights, fitness classes or books.
  14. Special-occasion dining out.
  15. Special travel and vacations.
  16. Special gifts for a major birthday, a stray wedding or a GoFundMe account for a sick co-worker.
  17. Special entertainment, like concerts or theater.

First note how much you think you spend on each category. Then figure out how much you actually spend by gathering up your bank and credit card statements, looking for those sneaky auto-payments.

Now look at the gap between the two categories. Say you think you spend $600 a month on groceries but you really spend $900. Drill down on whether the 30% extra is caused by impulse buys. (It probably is, because the grocery store knows more about marketing than you do.) A fix may be paying $10 for an Instacart shopper who will follow the shopping list better than you. If you spend more on clothes than you remember, it is probably because you, like most people, wear only a fifth of your garments.

Next, calculate net income — that’s what you get paid after employer deductions for things like health insurance, taxes, and retirement contributions. (Retirement savings is a whole other subject, but most experts advise saving at least 10% of your income, either through work or in an individual retirement account; for budgeting purposes, don’t count this 10% as take-home pay.)

 You are spending too much on essential expenses (items 1-10) if they take up more than 50% of your take-home pay. As for the fun stuff, items 11-17, you know you are spending too much if you are not saving 5% for emergencies or if you’re putting the fun stuff on credit cards and not paying your balance in full every month. 

Budgeting every month is tedious but it gets easier over time, and there is pleasure in mastering your budget. The key to success is making your budget flexible by adding and subtracting categories as you learn what you need to manage. But don’t change to too much, because comparing year to year helps you plan. Budgeting gives you control, something we sorely need in the roller coaster of the pandemic and government reshuffle.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Teresa Ghilarducci is the Schwartz Professor of Economics at the New School for Social Research. She's the co-author of "Rescuing Retirement" and a member of the board of directors of the Economic Policy Institute.

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