Whether you have a big dream that needs a financial incentive or struggle to make ends meet, a personal budget is a solution
Gaining control over one’s expenses and savings is a vital skill. In the modern consumer economy, financial independence is critical for survival. Your expenditures should equal your income unless you want to become poor and homeless in the long run. Spending thoughtlessly also prevents you from reaching both large and small financial goals. Therefore, it is important to consolidate all financial statements in a budget.
A budget may be personal or common (household). Essentially, it is a monthly forecast of all income and expenses and a powerful financial planning tool. However, not many people actually make one. It may sound boring or tiresome and it needs accuracy. Moreover, preparing a detailed budget may reveal one’s irresponsibility, wastefulness, and the real depth of the debt pit. Scary, right?
Yet, when you think about it, it also shows new opportunities. Becoming more aware of one’s finances brings freedom. You can consciously decide which items of expense can be cut down on. You can save for “a rainy day”, for education or retirement. You can make important purchases without taking out any loans. You can concentrate on your goals. Money is power, but you can also gain power over it.
Starting a budget requires time and effort, but it is easier if you do it step by step.
1. Calculate the income
Add up regular paychecks, social benefits, deposit interest, dividends to shareholders and all other additional sources of income. In the case of a household budget, it is important to take all the family members into consideration. If your income is stable, you may prepare a solid budget for a longer period. However, if your salary depends on daily output, sales levels or is otherwise flexible, get ready for constant revisions and modifications to your budget. Do not forget to include bonuses in your total income when you get them.
2. Count the Fixed Expenses
The few next steps need a little preparation. Take your time and store receipts and bills over a certain period. One month at least would be nice. Check the utility bills for a few previous months to calculate the average sum. Include rent, mortgage payments, loan payments, phone, TV and Internet bills, average petrol consumption, insurance fees, college fees etc. Remember all the regular payments you need to make every month. List them in the expenses column. Now do simple calculations. Subtract your fixed spending from your income. Here you have a sum for the variable expenses.
3. Start your savings
Before you proceed to the variable expenses, determine a sum you can afford to put aside. They say saving money is a habit of rich and successful people. If you have a specific financial goal, set the term and divide the necessary sum by the number of months. Consider opening a savings account with a good interest rate. Make this savings amount regular.
If you don’t have a financial goal, and yet feel you have some spare money, do not let it go to waste. Save it anyway. Think about both good and bad instances when you might need to spend a significant amount of money. Think about future vacations, possible car or house repairs, the prospect of starting a family, illness, purchase of new equipment or devices, taking a dance class or joining the gym, termination of an employment contract, new investments. The list could go on infinitely.
Even if it seems impossible, try to save at least a few dollars each month. It is good practice to learning moderation. Perhaps, in a while, the sum can grow larger since you are mastering efficient spending while making your budget. Anyway, you will always have an emergency supply of cash for unexpected spending.
4. Scrutinize the Variables
Now, see what’s left of your monthly income. You still have a lot of daily expenses to consider, but how you divide the rest of the money is up to you. The variable spending includes groceries, entertainment, clothing, toys, hobbies, events and parties, travel etc. Take a look at those receipts you have recently stored. Analyze them.
Make a rough calculation of how much you spend on food. Do you buy only necessary products or indulge in consuming sweets, snacks, sodas and fast food? Do you eat out or use take-out services too often? Modify your grocery limit and your diet if needed.
Consider your entertainment activities. Are they good value for money? Perhaps, you can find cheaper options with the same service quality. Perhaps, you can find free alternatives to those leisure activities you currently pay for. For instance, you can jog at the local park instead of having a premium gym membership. You can find free online tutorials and courses in various areas. Check whether you really watch all the paid for optional TV channels, or use the optimal phone and internet providers’ services. Set reasonable limits to your shopping, buying presents, and visiting paid for events.
If you really need to reach some financial goals quickly, get ready to tighten your belt for a while. However, that is not a reason for living monotonously. There are plenty of exciting activities that are free of charge or pretty affordable. Browse the internet or ask your friends to share some entertainment tips.
5. Divide the Variable Expenses
There are a few ways to do that. Choose the most convenient and suitable for your current situation.
- Categorize – Assign a certain sum you consider appropriate to each item of variable expenses (food, clothing, events etc.).
- Divide into time periods – Determine a sum for a week/day/10 days etc. and stick to it while spending. Do not exceed your limit, learn to prioritize.
Do not forget that every month is special. Be sure to take holidays, birthdays, anniversaries, and corporate events into consideration. Modify this part of your expenditure on a monthly basis.
6. Be flexible
Unexpected things happen. Do not let changing circumstances discourage you from your goals. Make adjustments to your budget, but don’t give up your dreams. Search for new options. Do not concentrate only on cutting expenses, think about additional income sources. Perhaps, you could turn your hobby into a small business. Maybe, you have a house full of the things you no longer use or need. Have a garage sale or sell online. Always look for options.
Working on your budget regularly enhances your financial planning skills. After a while, you may see flaws in your calculations, you may find cheaper alternatives to your fixed expenses, you may pay off debts, and set new more ambitious goals. Your budget should evolve with you. Revise it; adapt it to your current needs; set your priorities.
Remember, that even Santa has his little helpers. In the age of the rapid technology development, you don’t necessarily need to manage all those financial statements alone. There are many smart apps which can help you. Check our previous articles on the subject and take your money under control.
SEE ALSO: 5 apps for personal budgeting