First, some ground rules: A budget should not be thought of like a torture device. If you treat your budget like it's there to ruin your life, then your attitude needs to change. A budget is simply a cash flow planner - all it does is give each dollar a place to go so at the end of the month you know where your money went.
In order to work your budget, use what's most comfortable for you, whether it be a pad of paper, an internet budget form you found online, Exceluse what feels best to you. You can always transfer it to something else later.
Before you start categorizing budget, go back and look at your last three months of spending. Use either bank statements, look at your online checking, or for a very easy method, sign up to Mint.com and use its tracking feature so you can see where your money went each month to get a general idea where your money has been going (note: you may need to categorize some of the money so the tracker feature works properly).
Put each month in its own budget spending profile and track in what categories your money went. Did you spend too much on groceries? Can't believe you ate out so much? This is why it's important to spend a little time looking at the past three months - you need to see if there are averages or if you had unusual circumstances spike spending areas.
After looking at your past spending, spend a little time thinking about your life and what areas could be curbed or future spending needs. Will you need to make a medium/large purchase such as washer/dryer, or perhaps your beater car from your college life is on its last tire. Or perhaps it's time to pay off that credit card and stop using it. You'll need to create a space on your budget form and allot enough money for that item.
The next step is simple: Put down how much money you make a month. If you have irregular income, put in an estimate. We'll get to some special rules for you later.
Once that's complete, you're finally ready to make your next month's budget. It's important to make a budget for the month ahead so you can take control of your money and YOU tell it where to go; NOT the other way around.
List the standard expenses that you know you're going to have first. This includes rent/mortgage, bills, and groceries. This is where the previous months come in handy, because any bills you have that vary month to month generally have a cycle they follow. Over budget a few dollars if you're unsure or had some sort of significant change in the month (hint: most bills like electricity keep track all year long of your use, and you can always check your company's website to see your use patterns).
Next, list any savings and debts you intend to pay off. It's important to include any savings you plan as if it were a bill. If you need to set up an envelope system to save the money or a separate savings account for big ticket items, do so. Do what works best for you and won't cause you to spend the money.
Last, list the fun things you do with your money - things that make life worth living but aren't necessary to letting you survive in the event of an emergency. And make sure you have an "Oops" category - money to smooth the way. In other words, use it for any items you might have forgotten for the month in your first time of budgeting.
Once you have your categories, put in a reasonable amount in each category and see what your total is. If you have leftover money, consider your budget and your goals. Some good rules of financial health are to keep your consumer debt at a minimum or eliminated, and to keep an emergency fund consisting of liquid cash that amounts to three to six months of living expenses. Or perhaps you have another goal, such as saving up for a house. It is important to make sure there is no leftover money, otherwise you'll wonder where your money went and be back where you were at in the beginning.
Special note for people with irregular income: The reason it's important to set your budget like this is so if you have a month where you don't make enough money to cover your needs and wants, you know you can cover the things at the top of your list before you cover the wants at the bottom.
No matter what your financial goals are, by starting a budget you are taking the first step towards control over your finances and life, and providing for your life's dreams.