How to Make a Personal Budget in 6 Easy Steps
As someone who wants to attain financial goals and control cash flow, then you should work on a personal budget. Knowing how to make a personal budget will give you total finances a meaning.
What Is A Personal Budget?
A personal budget is your personal estimate of spending and income for a specific time range. Your budget summarizes your projected income and expenses within a given period of time. And even though the word ‘budget’ has severally been used for restrictive spending, it however doesn’t have to be restrictive to become effective.
Your budget should reveal your expected income, and then, compare to the expenses you are required to make and your discretionary expenses. Required expenses could be insurance, rent, repairs, and so on, while discretionary expenses could be eating out or entertainment. And rather than having a negative perspective of budgeting, it is a better approach to view it as a means to attain to your financial goals.
Making a personal budget relies on balance. When you cut down on your spending in an aspect, you’ll be able to do more in other aspects, or put the extra together for a bigger plan, increase your savings, save yourself in a ‘rainy day’, or focus on wealth building. You will achieve your budgeting goals by being sincere and accurate with your financial details.
So, if you have a concrete way of personal budget, you’ll know where your money is coming from, what exactly you have left, and where it will be going per time.
No, let’s dive in safely.
How To Make A Personal Budget In 6 Simple Steps
Before starting out, create a personalized template to have your income and expenses highlighted. Going old-fashioned with the use of conventional pen and paper is nice, but you’ll be more efficient making use of a budgeting app or a budget spreadsheet. Harnessing this method will help you to contain designated portions for your spendings and your incomes. The tool also has built-in formulas that can help you in figuring out the shortfalls or excesses in your budget without stress.
Step 1: Put Your Financial Paperwork Together
Your very first move towards making a personal budget should be to put together all your financial documents. These documents should include your investment accounts, credit card bills, bank statements, mortgage or auto loan statements, W-2s and paystubs, 1099s, recent utility bills, and your last three months’ receipts.
If you are able to produce more information, it would help your plan better. These materials will help you dig up necessary information about your income and expenses. One of your major focuses in the process of making a personal budget, is to create a monthly average.
Step 2: Do An Estimate Of Your Income
If you receive a regular paycheck with taxes automatically subtracted, then it is fine that you use your take home pay here. And if you are a business owner and do your own things, or just have other side-incomes aside your take-home pay, for instance, Social Security or child support. Then you should do a total calculation of all your monthly earnings as a monthly income.
And as a freelancer or someone earning variable income, then you should make use of the month you earn the lowest income in the previous year as your starting point when setting your personal budget.
Step 3: Highlight Your Monthly Expenses
Next is to create a list of the spendings you make within a month. Your expenses list could include groceries, personal care, car payments, insurance, childcare, entertainment, student loans, mortgage payments or rent, eating out, transportation costs, travel, utilities, and savings. Your last three months’ receipts, bank statements, and credit cards statements should help in identifying your regular expenses.
Step 4: Determine Variable Expenses From Fixed
Your variable expenses are the kind of expenses that you make with irregular amounts from month to month. These include entertainment, gifts, groceries, and eating out. Fixed expenses on the other hand, are mandatory expenses that occur in the same figure every month. These include your rents, mortgage, car payments, childcare, trash disposal, and so on. And if you have made a standard credit card payment, add the cost too and every other compulsory expense that recurs in the same figure month after month.
Perhaps you plan to keep a certain figure in savings or for payment of debts, then include your debt and savings spendings as fixed expenses. There are some expenses that may pop up during the course of the month. If you do not have an emergency fund, create a “surprise expenses” category for this kind of expenses that may arise and derail your personal budget.
Add a spending value to the categories you have created – better if you begin with your fixed expenses. Make an estimate of how much you’ll be needing for variable monthly spendings. And if it is unclear how much goes from each of the categories, then you should consider reviewing your bank transactions or credit card for the past two to three months to make a rough estimate.
Step 5: Calculate Your Total Your Monthly Income and Expenses
What are your monthly expenses in relation to your income? Are your expenses below your income? Then that’s a good start.
The extra funds you have from your income can go into other aspects like, payment of debts, or saving for retirement. And you could also consider making use of the 50-30-20 budgeting rule if you get more income than expenses. In this kind of budgeting, your compulsory expenses – which you cannot do without – would take 50% of your budget, wants will take 30%, which debts and savings would gulp the remaining 20%.
And if you find out that you spend more than you earn, then it is important that you do an overhaul of your cash flow as you are overspending.
Step 6: Restructure Your Expenses
If your expenses are beyond income, you should consider looking out for aspects of your variable expenses to cut down on. Consider areas you can reduce your spending. For example, you may want to consider canceling your membership at the gym or cut down significantly on how much you eat out.
And if your expenses are quite monstrous to your income, it may be insignificant just reducing your variable expenses. You may want to consider strategizing on increasing your income and cutting down on your spendings, so as to keep a balance to your budget. Work at keeping what you spend and earn at equal proportion at least, which means that all your income has a budget that meets your savings goal or a specific need.
Here Is How You Should Use Your Budget
Monitor and track your spendings within each category after creating your budget. You will be able to use the same budgeting app or spreadsheet used in the creation of the budget to also record the totals of your income and spendings.
When you are able to take a regular accurate record of your spendings and expenses each month, you will avoid spending in excess and cut down on wants or spending patterns that are not progressive.
So, instead of waiting till the end of the month to do your record, create a few minutes each day to achieve it. And if you do not seem confident in going about your personal budgeting yourself, then you may want to adopt the envelope system that allows you to divide cash allocated for expenses into separate envelopes and for different categories of spending. And when an envelope for a specific category becomes empty, then you’ll have to quit making out cash for that category until your next income. There are budgeting apps that can help you achieve this goal.
Keep watch over your expenses while using your personal budget. Once your spending limit has climaxed, then you better have to quit spending for that category, or in a few situations, move cash from a different category into that category. In all, try to keep your expenses below or at par with your earnings.
Important Tips For Budgeting
- After setting your personal budget, customize it according to the goals and conditions of your finances.
- If your earnings are based on commission, then you should get more aggressive with your savings to fill in for times when the market would be slow.
- Peradventure you find yourself spending excessively in one category, employing budgeting hacks such as switching your budget into a cash-only.
- Do credit card payment only if there will be cash to pay off by month end. If not, you would still need to settle interests over what you have purchased.
- If you have issues that are connected to cash flow especially because you are paid once in a month, then break that payment into weeks and keep the cash for the other weeks in a separate account until they come.
- Once you have started achieving spending less than what you earn, start making a budget towards savings before you consider spiking up your expenses.
- Reshuffle your monthly budget if it turns out that you either underestimated or overestimated your spending. And keep an eye on huge spendings that occur on very few occasions, such as insurance.
- Educate yourself on finances and learn other related skills to improve your knowledge and how you handle your finances to achieve bigger goals.