Budgeting 101: How to Create an Effective Budget

Often people think of budgets as being punitive or restrictive, and that is often missing the point. Budgets are a way to have goals and targets, if you go over-budget it’s not as if you magically cannot spend more. It provides you with some guidance to say that you should look at why you didn’t meet your budget and see whether the amount should be changed or if you just didn’t do a good job of meeting your target.

That is why the most important thing you can do is to set a realistic amount for your budget. Setting an amount that is too low will mean you’re likely to go over often and it won’t be useful to you since you will come to expect being over-budget anyway. If you set a very high budget then that’s setting too easy of a goal and will also defeat the purpose of your budget. In essence it’s no different than setting any other goals in your life.

If you’re not sure what a reasonable amount should be, start with pulling your expenses for the last few months and for each category you want to track calculate the average monthly spend, and use that amount as your budget. From there you can try to adjust your budget as you getter a better idea of if it is too high or low, or if you just want a more aggressive target.

You also want to be careful with your categories to make sure you are not making it overly onerous on yourself by tracking every time you purchased cheese. The less painless you make the process the more likely it is that you’ll want to follow it.