How To Create An Effective Budget

Let’s face it, nobody wants to budget but everyone should no matter their financial circumstance.  I decided I’d do a budget of my own and here are a few things I discovered on my journey to penny-pinching.

Set your Financial Goals.

Why are you making the budget? Whether it is saving for a new purchase, paying off debt or investing in your future you should note the reason to remind yourself of the importance of using a budget.

• Think SMART – goals are specific, measurable, attainable, realistic and time based.

For example: You want to save $10,000 for a down payment on your dream car by September. It is realistic and attainable to do so if you work hard and follow the budget

List your Income and Expenses. 

For 1 whole month take a list of all your expenses and sources of income. This will be the foundation of your budget and will give a clear idea of where you need to improve your spending.

• Subtract expenses from income and if you are in a deficit well then you are taking a good step in creating this budget.

Categorize your Expenses.

Discretionary Expenses are not necessary and can be avoided e.g. Vacations, club memberships and new shoes (Yep, I said it – those new heels are simply not needed, Put ‘em down!)

Non – Discretionary Expenses are grudge purchases that cannot be avoided and are necessary like insurance and loans.

Fixed Expenses stay the same each month and do not change e.g. rent, mortgage, and childcare.

Variable expenses change month to month e.g. phone bill, hydro, clothing, entertainment.

• Your aim is to reduce your discretionary and variable expenses. It is much harder to cut back on non – discretionary and fixed spending.

Create your budget.

Your aim is to balance your budget at 0. This does not mean you spend everything you earn – no more, no less. It means you allocate every dollar to a purpose, mainly expenditure, debt payment and savings.

Record your spending each and every month and adjust your spending in areas that you are overspending.

Remember when budgeting:

If you’re income varies on a monthly basis do not over estimate your future income. Always refer to the lowest possible amount that you could receive.

If you are an impulsive spender, leave your credit card at home when shopping for an item that you deem necessary. This will ensure you avoid buying an unexpected outfit and will ensure that pesky buyer’s remorse is left to be felt another day.

Your budget is not set in stone. Circumstances change so too can budgets.

You aim to improve your spending and success is closely related to failure. Remember that you may drop the ball but it can always be picked back up.