Tips to Create an Effective Budget For You

Do you think budgets are a concept only for penny pinchers? If you have a high salary, you may not see the necessity of tracking every dollar you spend. But creating an effective budget can still be highly beneficial to your wallet—no matter how big or small.

Wealthy people are anomalies compared to most of the world. Unlike most of us, they have plenty of savings and no debt. A budget will help keep things that way. Remember this universal truth: the earlier you start budgeting and saving, the harder your money will work for you. Frivolous shopping purchases, regular restaurants visits, and frequently giving to family and friends all add up quickly.

I’m not saying you shouldn’t indulge in these things from time to time, but being mindful of your spending habits allows you to save and invest a larger chunk of your paycheck each month. That way, instead of your money mysteriously disappearing, it will multiply.

“Planning and controlling consumption are key factors underlying wealth accumulation,” wrote Thomas Stanley and William Danko in The Millionaire Next Door. “Operating a household without a budget is akin to operating a business without a plan, without goals, and without direction.”

If You’re Spending Less, You Can Invest More

By maintaining an effective budget, you’ll know exactly how much money you’re saving, and in turn, you can give your savings a chance to work for you. Maintaining a monthly budget and investing for the future will also provide you with a sense of security. As you probably already know, there are considerable tax advantages to putting extra funds in your 401(k) retirement account, IRA, or health savings account (HSA). There many other investment opportunities available, from guaranteed products like annuities and CDs, to different mutual fund or stock portfolios.

Your extra savings from budgeting could also be used to buy real estate or invest in other business ventures. Obviously, these options come with different levels of risk and should be carefully assessed before taking the plunge. But once you create a budget, you’ll see there is a myriad of things you can do with your extra funds.

With this in mind, let’s examine the best way to create a monthly budget so you can ensure your money is always working in your favor.

Getting Started On a Budget

Creating an effective budget can accomplish another beautiful thing: it will cause you to pay attention to the things on which you are spending your hard-earned money. By focusing on your individual expenditures each week or month with a budget calculator or budget planner, you’ll probably make better decisions about how you spend, save and invest.

  • Track your expenses. Go through your bank statements and write out every bill and monthly expense. You may have to average some of them, but that’s okay. This includes all your utility bills, your mortgage, car payment, home, car, and life insurance, child support, child care, student loans, cell phone, gym membership, credit card payments, prescriptions and other outstanding loan payments. It’s best to write these out in a budget planner spreadsheet so you can have everything in front of you.
  • Record other expenses you encounter throughout the year (excluding monthly expenses) and divide by 12. This includes things like property taxes, car repairs and oil changes, vet bills, glasses or contacts, tax preparation fees, medical expenses, charitable giving, vacation expenses and also camps and lessons for your children if you have them. Dividing the total amount you spend on these items annually by 12 will give you an average of what you need to set aside per month.
  • Add up how much you spend in various categories per month. Go through your bank statement again and write out approximately how much you spend each month on essentials. These include groceries, gas, clothing. Don’t forget extras like restaurants, parking fees, hair salon fees, gifts, traveling and entertainment. Analyze these amounts. Are you happy with how much you’re spending in each area? If not, set a budget or limit of what you believe is reasonable and attainable.
  • Record your total monthly income after taxes and subtract all of the above expenses. How does your bank account look now? Are you spending more than you make or is there a considerable amount left over to save? If not, it’s time to make some adjustments in your budget planner in order to create a more sensible plan.
  • Stay on track. After you create your budget, start regularly tracking your expenses and checking your bank account to see if you’re staying on track. This is the hardest part. You can either do this with your own spreadsheet or use a website that does it for you like Mint.com. Once you enter your credit and/or debit card information, Mint tracks all of your expenses in various categories and sends you alerts if you have overspent in certain areas.

The 50/30/20 Rule and Emergency Fund

First, I recommend creating an easy-access emergency fund savings account that contains at least six months of your monthly income. Next, I would implement the 50/30/20 rule—reserving 50% of your income for essentials like housing and food, 30% for lifestyle choices, and 20% toward financial priorities such as debt payments, retirement contributions, and savings.

As you get more comfortable with your monthly spending habits, this 50/30/20 ratio will change, eventually skewing toward saving more. Please remember, budgeting is often very trial-and-error. You may need to adjust it on a monthly basis until you get in a groove.

The Bottom Line: Don’t Give Up

One major advantage of creating an effective budget is the way it helps you discuss money and goals with your spouse or family. It also ensures everyone involved in the discussion is on the same page and understands the underlying plan. Statistics reveal money is the most common topic that couples argue about. But it doesn’t have to be that way. When you learn how to make a budget together and re-evaluate it each month, you’ll have a more positive outlook on your future together.

A budget can also set a positive example for your children or other family members. If you don’t want your loved ones to squander their money and opportunities, lead by example and create a budget. Let’s not sugarcoat it—sticking to a budget can be difficult. But it’s usually the difference between living a stressful retirement versus the retirement of your dreams. Much like a diet, you have to be dedicated in order to see results. Good luck and happy budgeting!