How to Create an Effective Budget
Start with Your Values
The key to an effective budget that you will stick to is figuring out what matters most to you. Decide what YOU value. Too often, we base our spending and saving decisions on what someone else tells us to do, or on what others think is popular. Rather than putting together a dry list of things you "should" spend your money on, and thinking about how much to save, start out by thinking about the kind of lifestyle you want now and in the future.
Your budget should be about helping you reach your short-term and long-term goals. This doesn't mean you'll be able to do whatever you want, whenever you want (you do have to work with your income and set expenses), but it can reduce the amount of money you waste on things that are unnecessary and unimportant to you.
Determine what makes you tick. Decide what's important to you, whether it's paying for schooling, being able to afford an unpaid internship or setting aside money in an account each month so you can travel. Then start your budget from there. You might be surprised to learn that now is even a good time to start thinking about saving money for retirement.
List Your Income and Necessary Expenses
Once you understand what matters to you, it's time to look at income and necessary expenses. Pay attention to where your money comes from and how often you receive it. List your necessary expenses. These are items you are required to pay, such as housing costs, insurance premiums and groceries. Don't just look at a list of numbers, though. Notice when your bills are due in relation to when you are paid. Timing matters when making an effective budget. If you are paid twice a month, dividing your expenses by when the bills are due in relation to your paycheck can help you avoid cash flow problems. If you are paid once a month, space out your expenses when possible so that you have an even cash flow. Some creditors will let you change due dates if you call and ask.
Spend on What Matters to You
After you have a good idea of where you stand with income and necessary expenses, you can create a smart spending plan that works for you and is in line with your values. If you want to save up for an early retirement, that's money you earmark before you buy a big TV.
Automating a lot of your spending can help you stick to your budget by ensuring that you put money toward what matters before you waste your money on what doesn't matter. You can have a portion of your paycheck reserved for a retirement account.
Set up automatic transfers from your checking account to a savings account to help you save for travel because it takes that money out of play before you can spend it on a trinket you won't care about in two months.
Tweak Your Budget
An effective budget isn't set in stone. You can tweak your budget as your priorities change. If you realize that you don't have money for something you really want to do, look at your budget and figure out which items are holding you back. When you order your expenses by importance, you can quickly make the decision to cut the least important items from your spending. Finally, remember that you can also make more money. Your income isn't fixed. Look for ways to make extra money on the side so you have more to work with.
Budgeting doesn't have to be boring or disappointing. If you approach it as a way to help you direct your financial resources so that you can build the lifestyle you want, it's more effective -- and easier to stick with.