Many people are not able to stick to a budget for the simple reason that their budgets are far from realistic. A budget that underestimates spending, for example, won’t offer a solution to troubled finances or help make ends meet. Instead, it will just become an ineffective tool that probably will quickly be dropped and forgotten.

That is why making a budget shouldn’t be a wishful thinking exercise. In fact, it should be based on the less conservative spending that you sometimes do either because of the luxuries that you enjoy or because of emergencies like car repairs, house unscheduled maintenance, etc. that come up.

When you take all of this into consideration, you’ll be more likely to have a functioning budget, although that is not everything that you need to balance your finances. What you need is to draft your budget as a living document that evolves with your needs and with the changes in your income. Here are a few tips on how to make a functioning budget.

Use real data

If you’ve never had a budget, you need to start from scratch. Whether you’re using a notepad, software or an online service, get only real data. Refer to your bank statements, credit card statements, receipts, paychecks, etc. The reason you must always use actual data is to avoid the very reason you’re unable to balance your finances without a budget, which is: using inflated or underestimated perceptions of your income and spending.

Don’t cut down just yet

Your first draft should be a presentation of your current situation. Don’t try to make it fit your perfect image of spending or saving. Keep it as a reference of what your current patterns are. In fact, the more sincere you’re in listing as many miscellaneous items as possible on this first run, the better you will be equipped afterward in making adjustment.

Note, however, it may be difficult because you were not tracking your spending in the past to get an accurate idea at this stage, particularly if your purchases have been mostly in cash. With that in mind, take a couple of months to track your spending and try to find out exactly where your money has been going.

Develop a budget

As mentioned having a budget that doesn’t reflect your lifestyle and expecting it to change your way is unrealistic. Your budget should list your basic spending items as accurate as possible, then include many of the luxuries that you know for sure that you won’t be able to give up.

If you find out at this stage that your spending significantly exceeds your income or your desired limit, trim down in areas that are less significant. Use a list for those spending cuts and set a time frame for each. By doing so, you will be able to track down your commitments and, also, realize if the cuts are as significant as you planned. For example, if you schedule a cut on dining out of DH200 a month, this may seem easy at first. But in reality you only will know if it works or not when you eventually see your efforts paying off.

Reviewing your budget

Life changes, and with its ups and downs your spending can change significantly. For example, if you’ve a health crisis in the family, in addition to medical bills, you may have to spend more on recreation to distract children, eating out more often because of the interruption of family routine, etc. All of this may add up to much more than the cost of the health issue in itself.

That is why it is important to always review your budget and ensure that any unplanned expenses are absorbed by cuts somewhere else. If these expenses end up on your credit card, plan to pay them off as soon as possible. By doing so, your budget will turn into a useful tool that helps detect money problems and solve them before they spiral out of control.

Rania Oteify a former Gulf News Business Features Editor is a Seattle-based editor.