How do I Create an Effective Budget?

An effective budget references your past to predict your financial future.
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Creating a budget demands doing more than choosing numbers and writing them down. To make a truly effective budget, you need to analyze your earning and spending patterns over time and create a plan that not only reflects this past but allows for the twists and turns of the future. Take a tip from economists who study chaos theory, or the art of predicting the unpredictable, and apply the philosophy to your savings, investment and spending goals.

Step 1

Opt for a budgeting style that supports your successfully sticking to the plan. Some people prefer the broad-based budgeting style of the 60 percent solution, in which you cover all expenses with 60 percent of income and dole out the rest toward savings, retirement, irregular expenses and fun money. Others prefer a stricter plan based on exact figures.

Step 2

Record your plan. Choose an online budget worksheet, spreadsheet, hard copy or piece of paper that gives you room to make various categories, set goals and divide your various sources of income from your expenses.

Step 3

Enter all relevant income information. Total your yearly net income, including employment income, bonuses, gifts, alimony, awards and interest. Divide the figure by 12 to arrive at a monthly average, or list a range of figures.

Step 4

Perform the same exercise with expenses. If you prefer, you can distinguish between monthly fixed expenses, such as mortgage, telephone, cable, internet, garbage collection, insurance premiums and loan payments, and more variable expenses, such as utilities, entertainment, recreation and groceries. Some people give their variable expenses a total figure rather than itemizing each expense, affording them greater flexibility in spending.

Step 5

Amortize irregular expenses. Go through financial records to get an idea of how much you pay for house maintenance, car repairs, medical bills, medication, hobbies, vacation, gifts, charitable contributions, property taxes, income taxes and other irregular expenses. Enter a monthly average or create a special short-term savings account to which you deposit money monthly to cover these irregular expenses.

Step 6

Tackle the budget-busters. If you have your debt paid off and a savings plan in place, certain culprits can be your budget-busters, such as daily coffee drinks, retail splurges, restaurant meals and magazines. If you suspect a cash leak, record all your purchases for a month and figure out where to make cuts. Commit some money toward a miscellaneous category, or an adult allowance, to maintain a small amount of spending freedom.

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