How to Create an Effective Budget

By: Amanda Anne Ali

At some point in life, everyone must learn how to budget. It took me 27 years, but finally I admitted to myself that I just could not continue to spend freely and "shop away my life" as I like to say to my family and friends. It is not an easy thing to put into practice, and I must admit that I was terrified to actually confront the reality of my financial situation. There are countless ways to budget, and after googling it extensively and reading financial articles and books, I have come up with the method below that has been working well for me.

Note: The month before you start your budget, use the time to observe your spending habits. Determine your sources of income for each month, transportation habits (how often you put gas/the average amount of gas you use, how much you spend on public transportation), how often you buy staple toiletries and groceries etc. Remember, this will change each month but you need to determine the average in order to create a budget.

Materials: You will need a notebook that is exclusively dedicated to your budget.

Your budget will be set up in three main parts:
A) Sources of Income
B) Monthly Bills
C) Monthly Expenses

Set up your budget as follows:

Summary
Usually summaries come at the end, but I like to do the summary on the first page of the month so that I can quickly see the results when I look back through the months. Here is what the summary page should look like:

	Estimate	Actual
A) Source of Income	$	$
	-	-
B) Monthly Bills	$	$
	-	-
C) Monthly Expenses	$	$
	=	=
Results	$	$

Once you determine your estimate numbers for each of the three sections, you can enter it into the appropriate space under the "estimate" column and calculate your budget amount for the month. The formula is as follows:

A) Source of Income - B) Monthly Bills - C) Monthly Expenses = Estimated Budget for the Month (Results)

Add a comments section on the bottom but leave it blank for now. At the end of the month you can quickly write down your unexpected costs, what you did well on and what you need to improve.

A) Income

Part 1: Sources of Income - Estimate
-List all of your estimated sources of income such as pay cheques by date.
-Add up the total and write the number under "Total Monthly Income Estimate." This is the number your budget will be based on.

Part 2: Sources of Income - Actual
-In the second half of this section, you will list all your actual sources of income for the month as you receive it.

B) Monthly Bills

Part 1: Monthly Bills - Estimate
-Write down all of your monthly bills by due date. For example, you would write down any credit card payments, phone bills, mortgage payments, gas/hydro/water bills, bank account fees, cable/internet bills, insurance bills etc.
-Add up the total and write the number under "Total Monthly Bills Estimate.”

Part 2: Monthly Bills - Actual
-In the second half of this section, you will list all of your actual monthly bills as you pay them for the month.

C) Monthly Expenses
Part 1: Monthly Expenses - Estimate
-Create a chart like the one below breaking down your budget by category. These are just the categories I use each month, but feel free to add anything you like. Make sure you are budgeting but still being realistic based on your needs. Leave the "actual" column blank and fill in the numbers at the end of the month.
-Add up the total and write the number under "Total Monthly Expenses - Estimate."

Category	Estimate	Actual
Groceries / Food	$	$
Gas / Transportation	$	$
Medical / Dental	$	$
Personal Care (toiletries, makeup etc.)	$	$
Entertainment (restaurants, books, movies, outings etc.)	$	$
Gifts	$	$
Savings	$	$
Clothes / Shoes / Accessories	$	$
Miscellaneous (lottery tickets etc.)	$	$

Part 2: Monthly Expenses - Actual
-Divide each page into half and write the name of a category as the title (you can use a whole page for each category if you feel like you will need more space). Do this for each category on your chart in Part 1.
-Write down the amount you spent and what you spent it on under the corresponding category each time you make a purchase. This is the hard part, but in order for your budget to be effective you need to keep track of every dollar that you spend. I keep all of my receipts and enter them at the end of the day or whenever I get a chance. I also use my online banking account to get my purchase information when using my debit card. Make sure that you are not going over what you budgeted for each category.

End of Month Tally:
Step 1) Add up the total in Section A) Part 2 and write the number under "Total Monthly Income - Actual) and record it in the appropriate column on the Summary page.
Step 2) Add up the total in Section B) Part 2 and write the number under "Total Monthly Bills - Actual" and record it in the appropriate column on the Summary page.
Step 3) Add up the total in each category in Section C) Part 2 and write the total for each category in the "actual" column of the chart in Part 1. Write the sum of the numbers in each category and write it down under "Total Monthly Expenses - Actual." Record this number in the appropriate column on the Summary Page.
Step 4) Do the calculations:  A) Source of Income - B) Monthly Bills - C) Monthly Expenses = Results for the month.
Step 5) Compare this final number to the number in the estimate column. Determine how much you are over or under your monthly budget and write down any comments.

Adjust your budget as you see fit each month. It is eye-opening when you actually see where all of your money down to the last penny is going. Don’t get upset or discouraged if you are over your budget; just make a goal to do better the next month. The hardest part is actually starting, but once you get going it can be life changing!