How to Make an Effective Budget

Creating a budget can help you plan for upcoming expenses.
Creating a budget can help you plan for upcoming expenses. (Image: Jupiterimages/Brand X Pictures/Getty Images)

An effective budget helps you achieve your financial goals and manage your money wisely. By taking into account fixed expenses, like housing payments and cell phone bills, you can have better control over the amount of money you spend on unfixed or unnecessary expenses, such as what you spend at coffee shops or restaurants. To make an effective budget, you must first track your expenses for at least one month, keeping track of all the money you spent with cash, checks and credit cards, so you learn about your spending patterns and make necessary adjustments.

Things You'll Need

  • Paper
  • Pencil
  • Receipts and bills
  • Calculator

Track your expenses for at least one month. If you choose not to keep all the receipts, write down the transactions on a piece of paper. When recording your expenses, write down the date, a description of the purchase, the amount spent and form of payment.

Break your expenses down by category. Legal website Nolo suggests using categories such as food, clothing, home, health care, transportation, self-care, pet care, debts, education, travel, clothing, gifts, office supplies, savings, taxes, entertainment and dependent care. If you wish, break the categories into subcategories like utilities, groceries, student loans, credit card bills, auto insurance, club memberships, gasoline, bank fees, medical co-payments, music lessons and prescription costs.

Record the amount spent in each category. In the future, you should continue to record the amount you spend in each category on a monthly or weekly basis to make sure you are on track.

Indicate your necessary fixed expenses by placing an arrow or bullet point next to the appropriate category. Fixed expenses do not change, and include insurance payments or rent. For necessary expenses that vary slightly by month, like the utility bill or groceries, make a note of how much money you plan to budget toward those costs.

Add up all your expenses.

Subtract your monthly wage from your monthly expenses. The answer is the amount you have left.

Adjust your budget as you see fit. For example, if you wish to have more money left over at the end of the month, look at your unnecessary expenses, like recreational or entertainment costs, and determine which items you can do without in the future. Set spending limits on unnecessary expenses like clothing or extra trips to the coffee shop. Budgeting and allocating saved money toward future goals can help you build your savings account, pay off your credit cards faster or pay cash for a large purchase.

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