How to Create an Effective Budget

A budget is a great way to manage your finances, save for specific goals, or simply pay off debts.

Calculate your monthly income after taxes. For this budgeting plan, you can use your net income or take-home pay. Include bonuses, extra earnings, overtime, investments, etc. This will be your total income.

Track your expenses. Keep receipts for a few weeks or a month. Understanding your monthly expenditures on household items or fuel (for example) will make the next step easier. If you want to start budgeting today but don’t have receipts, it might be a bit challenging.

Set your goals. Defining your goals will help you stick to your budget and provide a way to measure your success or failure in following the plan. Why are you setting up a budget? Perhaps you want to start saving for college, or you aim to pay off debt.

Break the budget down into key categories, such as Housing, Food, Transportation, Entertainment, Savings, Clothing, Healthcare, and Others. You can also organize your spending by necessity—like loan payments and utilities—and by desires—such as clothes and entertainment.

List all expenses for each category. For instance, let’s take Transportation as an example: In the US, you might spend around $300/month (more than 6 million VND) on a car, about $100/month (over 2 million VND) on insurance, approximately $250/month (more than 5 million VND) on fuel, around $50/month (over 1 million VND) on maintenance, and about $10/month (more than 200,000 VND) on other fees, like registration. So, your total transportation budget could be $710/month (over 14.2 million VND). If you're not sure about your exact spending, estimate as accurately as possible. The more precise you are, the more likely you are to stick to your budget.

Add up all your expenses by category. This will help you see your total monthly expenditure. Compare this with how much you earn each month after taxes.

Decide on a method to track your budget. You can use a classic yet high-quality accounting ledger, often found in shopping malls. Some people prefer computer software like Quicken or Microsoft Money.

Set up an accounting ledger. Leave the first 5 pages blank, as we will use them later. After that, divide the remaining pages into sections once you’ve established the main categories. Write each main category on the first page of each section. This will give you room for multiple entries (accounting term for recording transactions) under each category. Some categories, like Food, may need additional pages.

Decide how long the budget plan should last. For example, I find a monthly budget plan works best for me since most bills are monthly. However, I log the amount for the budget twice a month. In other words, if my transportation budget is $710/month (more than 14.2 million VND), I’ll record a “charge” of $355 (over 7 million VND) on the 1st and 15th of each month.

Record the amount for each category at the start of each period, then log all the expenses from that category throughout the period. For example, for Transportation, you might start with $710 (over 14.2 million VND) for the month and then write down various expenses such as fuel, car payments, and possibly insurance (depending on whether you want to pay your insurance monthly).

Use the first section of the ledger to record income, then document the withdrawals for the budget in each period. For instance, I receive my salary every Friday, so corresponding entries will be made in the income section to log the income for each Friday. My budget is $2,800/month (over 61 million VND), and it’s withdrawn on the 1st and 15th of each month. Therefore, on the 1st and 15th, the income section will show a withdrawal of around $1,400 (more than 31 million VND).

• As time passes, you will notice that your initial budget has some errors. Some areas you underestimated, while others were overestimated. The issue here is that you didn't record everything properly. This is completely normal! Just review things again when you have a clearer picture of your spending. Remember to spend less than your income to achieve your goals.
• Another common issue is that people often see new and shiny items they think they need to buy (maybe from a certain store), and they go ahead and purchase them, even if it wasn't in the budget. Perhaps the item was on sale and they couldn’t resist! This is why it’s helpful to have a budget category called "Splurge" (or any name you prefer). This isn't a category for vices, but rather for spontaneous purchases! You really should include this category.
• Break bad habits. Smoking, drinking, and overeating are costly habits. Similarly, too many hobbies and frequent traveling also need to be managed, like a responsible adult – prioritize family first.
• There are times when you receive extra pay during special periods, meaning you’ll have extra money. When this happens, consider it as surplus money! You are free to use it however you wish. You can apply it directly to your goals or keep it in your bank account as an emergency fund.
• Your first month of budgeting might not seem to work out because if you’ve never tracked a budget before, it’s difficult to know how much to allocate to each category. DON’T GET DISCOURAGED. The second month may be better, but most people don’t have an efficient and realistic budget until their third or fourth month. You didn’t learn to ride a bike without training wheels in your first attempt, and you aren’t Michael Schumacher when you first get behind the wheel. Practice makes perfect!
• Another common issue when creating a budget is that people come up with a great plan, but then the car breaks down, and the plan falls apart. That’s why you should have an emergency fund as mentioned earlier. If you use this emergency fund for an urgent situation, don’t forget to adjust your budget by adding more funds to it the following month!
• The first time I did this, my expenses exceeded my income, which is why I wasn’t able to save anything! If that happens to you, do as I did: start cutting back on your spending plan. For example, my first budget was $150/month (over 3 million VND) for clothes. After revising, I reduced my spending to $80/month (over 1.5 million VND) for clothes. You can make similar adjustments to meet any financial goals you’ve set.
• If you keep your emergency fund in an easily accessible checking account (or a savings account!), it can be tempting to spend money when you see a new and desirable item. Try placing it in a money market account with a decent return rate (4-5%) and the ability to write checks. This will put you in a better financial position.
• Calculate how much you’re spending on gas. If you’re spending around $60 (more than 300,000 VND) a week on gas, try doing something different. Save on gas by taking the bus or riding a bike. Cycling not only saves on gas but also provides exercise. Some buses even offer services that allow passengers to bring their bikes on board, so you can bike and take the bus at the same time, which is pretty cool.
• Use apps that help manage your personal income and expenses, such as the app greefi.com, which helps you generate reports for your personal budget.
• Don’t try to start budgeting the first month after a major life event where you need to spend or save a large amount, such as a holiday, moving, receiving an inheritance, or winning the lottery. Wait until your finances are "in order" or in a stable state, usually 3 to 6 months later, before starting fresh.

• Sometimes, a budget can seem very tight. Just remember, you’re free to spend within that limit! When the holiday season comes around, you’ll have a separate fund ready, thanks to your budget, and you won’t need to scrimp and save every penny just to afford it.