It’s common knowledge that a personal budget is vital for financial success, whether you earn a hefty salary or a few dollars every now and then. However, getting started on a budget can be a bit overwhelming, and you may not know where to start.
Benefits Of Having A Personal Budget
Managing money can be tricky. However, with some determination and a dose of discipline, you can make your money work for you no matter what your level of income is. You simply need to learn how to create a personal budget that is manageable for you.
A personal budget:
1. Makes You More Aware
Budgeting helps you take a good look at your income sources, expenditures, debts and bills. Your budget will help you know exactly how much money is coming in, and from where. You’ll also know how much is being saved, how much you’re spending, and on what you’re spending money on. Your budget is a true reflection of your lifestyle choices.
2. Gives You Control Over Your Money
A personal budget will help you to be more intentional about how you spend, invest and save your money. Following a budget ensures that you don’t lack funds for anything as you will have planned out how your money will be used.
3. Will Keep You Focused On Your Financial Goals
A budget will help you achieve your financial goals by ensuring that you avoid spending money on unnecessary items or services. You will limit your spending enough to save for those things that you really need.
Tips For Creating A Personal Budget
Creating a personal budget can seem like a daunting task when you’re just getting started. The following tips ought to help make the process less confusing and scary.
1. Track Your Income
How much money are you making? Take some time to track all your income. Keep track of your salary and any other money coming in aside from what you earn from your day job. Only consider income avenues if they are bringing in a steady flow of cash. Do not consider income such as gifts or windfalls that are a one-off occurrence.
2. Keep Track Of Your Expenses
This is one of the most important steps in creating your budget. You should keep track of what you spend money on. This includes your recurring monthly bills, such as rent, utility bills and cell phone bills. It should also include your daily expenses such as newspaper purchases, food, groceries and personal items.
Keeping track of your expenses will help you see how much money you need to allocate to each category of expenses. You may want to consider using your bank or credit card statements for this. You can also retain all your receipts and go through them at the end of the month to assess your spending habits.
3. Set Financial Goals
Before you decide how much money to allocate for different items, you need to decide what your financial goals are. You should therefore set short-term and long-term financial goals.
Short-term goal are goals that shouldn’t take more than a year to reach. These may include saving to buy a new fridge, or paying off your credit card debt.
Long-term goals are those that will take much longer to reach. These may include saving for retirement, saving to buy a house, or saving for your child’s education.
It is important to note that financial goals aren’t cast in stone. However, by setting goals, you will have identified your priorities. This will help you allocate your money better.
4. Come Up With A Plan
Now that you know how much you’re making, what you’re spending and what you’re saving for, you can predict how much you need every month. Using the information you’ve gathered, come up with a budget based on your past spending habits.
You will need to come up with categories and allocate money for each category. For example, you may have categories such as savings, groceries, utility bills, rent or mortgage and personal items.
It’s important to note that your plan isn’t something that is set in stone. In fact, plans often change when your circumstances in life change.
5. Live Within Your Means
Having made financial goals, you may have to reassess your lifestyle choices in order to accomplish them. This may mean reducing your spending on items that aren’t necessary.
Go through your expenses. What areas can you cut back on in order to save money? Can you afford to skip that Friday night takeout or that coffee at your favorite hangout every day? Can you afford to downgrade your internet to a slower speed in order to save some money?
6. Review And Adjust Your Budget
Your circumstances and needs can change at any time. It’s therefore important to regularly review your budget and make changes when the need arises.
Have you recently had a promotion? You may need to adjust your budget to factor in the increased income. Has your child started school? You may need to cater for new expenses such as increased fuel if you’ll be dropping your child off at school, fees and other related expenses. Have you reached a financial goal? You need to adjust your budget to cater for new financial goals.
Allocating Your Money
One of the most frequently used pieces of advice for financial success is to live within your means. However, many people don’t know what that means. How can you decide what living within your means is to you?
It can be hard determining how to allocate your money even after tracking your income and expenses. An easy way to do this and ensure that you are living within your means is by applying the 50/20/30 rule. This rule will help you create a budget that is suitable for your income, and ensure that you can meet your financial goals.
The 50/20/30 rule is suitable for all levels of income. It is easy to use, and you won’t have to break down your budget into different categories. You simply need to allocate money to three main categories.
These are expenses such as housing, utilities, transportation and groceries. This category includes the things that are fundamental to your life. You should allocate 50 percent of your income to these expenses.
This category includes your financial goals e.g. debt repayment, contributions to retirement and savings. You should allocate 20 percent of your income to this category.
Because this category will help you reach your financial goals, it makes sense to make these contributions before you use money for any other expenses.
3. Lifestyle Choices
This category includes expenses that are voluntary, personal or for entertainment. These include hobbies, entertainment, gym fees, bars, restaurants, personal care, pets and other such expenses. You should allocate 30 percent of your budget to these items.
Having this category ensures that you never feel guilty about spending money on items that you love or enjoy. You can buy that expensive handbag as long as you’re ready to forgo other items in this category.
This method of allocation of money is easy and flexible to use. You can adapt it to any income level.