Six Tips for Creating an Effective Budget

Implementing new habits into your financial routine can positively impact your finances. Whether you're building a new budget or updating an existing one, these tips could help you to grow your savings and better manage debt.

1. List your goals. Determine what you want to accomplish with your finances. Do you want to cut back on spending? Start saving for a vacation or large purchase? Pay down debt? Even if you have previously set goals, reevaluate them; priorities may shift over time. Having a clear picture of where you want to be will help you create a budget that meets your objectives. 
2. Determine your monthly income. Take-home income can vary, even if your salary hasn't changed recently. Increased health insurance costs or changes to a retirement plan all impact your finances. Also consider if there are other factors to include, such as regular overtime pay, bonuses, or a significant other's income that is combined with your own. Do this regularly, as promotions or life changes could make a difference in these numbers. 
3. Review your monthly obligations and expenses. Consider mandatory recurring monthly costs first, such as rent and car payments. Next, consider discretionary expenses like cable, landscape services, and gym memberships. Look at the total of these monthly expenses and determine how much of your income remains after they are paid. As a general rule, housing should cost no more than 30%-40% of your monthly income, while credit cards, auto loans, and similar obligations should be kept under 25%. If your spending is outside of these parameters, consider reducing or eliminating expenses: for example, trade your car in for a less expensive vehicle or reduce the level of your gym membership. 
4. Categorize remaining expenses and budget for each of them. Start with major categories such as savings, utilities, groceries, and fuel, then list other areas that reflect your savings goals. Be specific with these categories — labeling them will help keep you from dipping into them for other purchases. Try to spend no more than 35%-45% on necessary living expenses, while saving at least 10%-15% of your income. 
5. Find a budgeting method that works for you. Many people use the envelope method, where each category and expense has its own envelope or savings account that holds the funds for that item. Other people find it more helpful to use budgeting software. Whatever you decide, be sure it’s a method that is easy for you to understand and use. 
6. Be flexible. It's important to work toward meeting your goals, but it's equally as important to be flexible if unexpected costs arise. Create an emergency savings fund for unpredictable expenses, such as auto repairs, medical bills, or emergencies that create occasional overspending.