An effective budget requires you to be realistic and honest with yourself. You have to be clear on what is a necessity and what is a luxury. You also need to realize that you cannot drastically reduce your expenses at a go.

You may be one of the many people who think that only significant incomes require a budget. The truth is, the ability to budget is an important step to making yourself good with money. It is a necessary skill that you will use throughout your life. When practiced at lower incomes, it comes good even at higher amounts.

Simply put, a budget is an estimate of the amount of money you’re getting or bringing in and the amount that goes to expenses. In its simplest form, it can be a two-column table with headings for income and expenses. Even the most complex budgets have this as the foundation. With that said, let us take a look at how to go about making your first budget.

1. Your Expenses Should Not Exceed Your Income

This is the number one rule in budgeting and your financial life in general. There should never be any deficit, meaning you should never be in the red. Some money should always be left over for saving or investing. If you are spending more than you earn, it means that you are in debt. The first step should be re-evaluating your expenditure.

2. Keep a Money Diary

A money diary is a great starting point when making a budget. In this diary, you should have exhaustive lists of purchases and payments you make within a specific budget period, most likely a month. Why? To understand your spending patterns. This helps with having accurate estimates of how much money to assign to every expense category, as well as identifying the expenses you can easily do without.

3. Pick a budgeting tool

With patterns established, the next step would be to pick your budgeting tool of choice. If you are traditional and super practical, pen and paper should do just fine. There’s something about seeing something in your writing that makes it sink. You may instead prefer to go digital and use your spreadsheet of choice; Google Sheets or Excel are both great. Mint is a great app.

Nowadays, there are plenty of dedicated budgeting mobile apps that try to make things super easy and straightforward. These apps help with the categorization of your expenses, say food, transport, internet, and phone bills. The most advanced apps have integration with email to automatically incorporate bills and/or receipts to your budget.

4. Choose a Budgeting Method

There are several ways you can go about budgeting. You may choose the Pay Yourself First approach, where you first set aside the savings and divide the rest of the money among the expenses. An alternative would be the Zero-Based budgeting approach, where every single dollar is assigned to a category and none is left over.

These approaches can be incorporated into the practical method of your choice. The very hands-on Envelope Method will have you take envelopes labeled with different expenses on them. You then place money assigned to the respective expenses in those envelopes. Money for groceries can only ever be used for groceries and so on. Graduating from the envelope method is important to take advantage for credit card offers and higher invest on your money with certain banks. The reasonably popular 50-30-20 method sees income percentages assigned to requirements, wants, and savings respectively. The last two are variably interchanged.

5. Be Realistic with Your Budgets

An effective budget requires you to be realistic and honest with yourself. You have to be clear on what is a necessity and what is a luxury. You also need to realize that you cannot drastically reduce your expenses at a go. It has to be gradual. Sudden reductions might cause the budget to fail, making you give up in the process.