7 min read

How to Plan an Effective Budget

Cara Adria Murphy
Business advisor
budget planning

A budget is a spending tool or plan that lets you have control of your monthly expenditure and income. It guides you into having a clear vision of where your money is going. The most important financial goal in our lives is spending less than what we earn. A budget helps us to save for emergencies, stash money away for future use and get out of debts or do things that are vital in our lives. Budgeting ensures you a financial freedom.

Here are some secrets on how to plan an effective budget:

Track Your Money and Create a Goal

Tracking your money and creating a goal is the first step of making a budget. Follow any payment and income that you make regardless of how small it is and do this for at least a month. You can opt to use a Smartphone app, old-fashioned way of paper and pen or a computer program. Once you get an idea of your expenses and savings, it’s time to set a goal.

Setting a goal gives you a chance to identify your needs and wants. It is the foundation for creating a budget. Write down all the stuff you need in your life and prioritize them on their importance.

 Here are some great ideas on how to start:

  • Set Out Short Term Goals

A short term goal is that goal that is configured and achieved in the shortest time possible. Your goal may be to pay off your credit cards or debts or even buy a new appliance. Short term goals should mostly cater for a need and not want.

  • Set Out a Medium-Term Goal

A medium term goal is a goal set and achieved within a certain period; maybe six months or a year. You can set a medium goal to make a down payment on your house loan, car, or take a dream holiday or open a business.

  • Long Term Goals

A long term goal is a goal that gives you a chance to plan for something that will happen in the future, typically the program may include saving for retirement, saving for children’s education, or paying off your home.

When planning on these goals think about the amount you need to set aside every month and the duration of time. Be realistic in the kind of targets you set and increase your savings later.

The goals that you set are yours; they give you the power to choose and plan them according to their importance, and you can design them accordingly. A clear goal helps you have a map towards achieving your financial freedom.

Use Our Family Financial Statement Template

Ready-to-complete professional document to record all your finances

Define Expenses and Income


Once you have tracked your money and set out goals, it’s the right time to know where they come from and in which direction they go. Start this by making a list of all your income earnings and their frequency (weekly, month end or daily earnings). Include everything from salaries (after all the taxes), self-employment income, pensions, child maintenance, commissions, spousal support and any other regular income.


After creating the list of your income earnings, it's now time for your spending or expenses list; this is always hard since most people have no idea how they spend their money. Expenses include everything you spend your money on; this includes groceries, transportation costs, utility bills, entertainment, life insurance premiums, RRSP contributions, debt payments, and savings for a rainy day are all expenses. You can easily track your family spending from credit card statements or cheque book registers, bill, receipts and bank accounts.

Tracking Expenses

In order to be aware of where your money goes, you need to keep track of each and every coin used daily, monthly or even yearly. Keeping track of expenses can help your plan to succeed. To track how much you use, divide all your expenses into three different categories and record each expense in a diary or a spreadsheet.

The categories are as follows:

  • Essential Expenses

These include rent, bank loans, utility bills, council tax, income tax, insurance, road tax and school fees. This category of expenditures should take at least 35% of your earnings. You can increase the percentage of mortgage payments since the costs are in forced savings and on tax-deductible interest.

  • Daily Expenses

These include food purchases, transport expenses (e.g. train tickets or petrol). Learn how to shop for food in bulk and pay your transportation costs in a lump sum. Most of the time you will receive discounts and save some cash, too.

  • Rare Expenses

This category includes but is not limited to gifts for family or friends, clothing, beauty services/products, birthday parties, household appliances, furniture. The daily costs and rare expenses should take the remaining 45% of your earnings. A tip for your rare costs: do your Christmas and other holiday shopping early and when things are on sale like during Black Friday.

Tracking your expenses will allow you to examine where your money goes. Additionally, it will efficiently improve your future budget by working out how to save more money. You should take the total expenses and divide by twelve to get the exact amount you use every month in each category.

Download Our Daily Expenses Template

Ideal document to record your daily expenses

Pay with Cash

Once you put aside a portion of your money for savings, investing and spending, it's time to make the numbers stick and work. Debit or credit cards make it easy to overspend.

With the exceptions of car loan and mortgage, it’s important for consumers to stick to the policy of paying with cash for clothes, vacations, groceries and non-essential items. Rely less on ATMs since they charge a fee and withdrawing a fixed amount for the whole month helps you to have better spending habits. 

Build a Safety Net

Regardless of your debt situation, you should start saving for a rainy day. Financial planners advise on opening a savings account specifically for emergencies. Some of the known emergencies include illness, an unexpected bill or job loss. It’s significant you set aside 3 to 6 months worth of expenses even when you are clearing debts. The best and painless way to save for a rainy day is to put aside any windfall that you receive such as tax refunds, bonuses or yearly raises. Another way is to try and save any change or $1 bills that find their way into your hands.

Live Within Your Means

Living within your lifestyle means spending less than your earnings, for most people, it means cutting back on some expenses. According to financial planners, consumers can reduce their financial costs without having to crimp on lifestyle. Controlling your finances saves you money, and it makes you a more secure person. Keep your credit cards below their limit and always ensure you pay them off monthly and in full.  Learn to have buying trips and looking trips. During window shopping trips, leave all credit cards at home and use that particular time to plan and budget on what you need. The lifestyle choices you make will determine whether you will reach your budgeting goals, or not.

Make Savings Contribution Automatic

Opening a savings account can help you achieve your set and desired budget. A golden rule of thumb states allocation of at least 10% of any income towards your savings. Using a direct deposit is one way of making your savings consistently, on autopilot and paying yourself first; “if you save money before you see it, you won’t even miss it.” Make your savings account very hard to access- remove your credit and debit cards entirely from the savings account.

Short-term Savings

Open a bank account that offers interest on short-term savings like money market fund or 6-month certificates of deposits.

Long-term Savings

For your long term savings direct the money towards a more tax-friendly retirement saving tools like 401(k) or IRA. The primary goal is to maximize your retirement funds to the maximum which is $18,000.00. It will give you a comfortable lifestyle after retirement.

Looking Ahead

A real budget needs periodic reviews, monitoring, and occasional re-evaluation. Circumstances may change, your needs may vary as time moves and mistakes may happen. It takes more time to monitor your budget when you start but after some time this routine will become part of your daily life. For the first year after making the plan, it’s vital to review it on a monthly basis then after one year you can make the review quarterly. However, in case any significant changes happen to your financial life, immediate re-evaluation is needed, and possible changes rectified. As you get more acquitted in the habit of managing your money, the whole plan will start feeling natural, and develop into a part of your life.

Cara Adria Murphy Business advisor
I am the owner and co founder of stay at home mom jobs. I strive to make a difference in the lives of women. Empowering them and imparting business skills to them. I have successfully mentored many women to start their own businesses and this is what drives me everyday.
I am the owner and co founder of stay at home mom jobs. I strive to make a difference in the lives of women. Empowering them and imparting business skills to them. I have successfully mentored many women to start their own businesses and this is what drives me everyday.

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