Let’s face it, it can be a bore—not to mention tedious, and often downright dejecting to learn you have less money than you thought you did.
However, being in debt or without a proper plan for your future is even more of a disappointment.
Instead, if you understand your spending habits, you take control of your future and can begin to build your savings and achieve your financials goals.
Today, we take a look at why and how you can create your own personal budget.
Reasons For Creating a Personal Budget
A personal budget is a financial plan which allocates your income toward expenses, debt repayment, savings, and retirement planning.
A budget is an invaluable tool to help you:
- Understand your spending habits: A personal budget can help you understand how much you spend each month. You’ll be more aware of how you spend your money and where you need to cut back on expenses, if and when necessary.
- Save for your future: By creating a personal budget you’ll be able to control how much money you contribute to savings for your future or for unexpected events such as job loss. Some experts recommend everyone save for at least six months’ worth of living expenses, no matter their situation.
- Not live from monthly paycheck to paycheck: A personal budget will give you a projection of how much money you’ll spend throughout the month so you’re not stressed about money until your next paycheck arrives.
- Ensure you pay bills on time: When you create a budget you can schedule loan, credit card, and bill payments in advance to make sure you pay on time. Paying bills on time and paying down your debt will boost your credit score , which means you’ll qualify for loans with better interest rates when you need them.
Steps to Create a Personal Budget
Now that you understand the importance of a personal budget, let’s detail what you need to do to create one.
Set Your Financial Goals
Write down your short and long term financial goals.
- Do you have debts to pay off?
- Are you trying to save for a family, a car, a house, or a vacation?
- Are you trying to save for retirement?
Each goal should be S.M.A.R.T – specific, measurable, attainable, realistic, and timely.
List Your Sources of Income
Make a list of where your money comes from on a monthly basis such as work, investments, loans, insurance, or retirement plans.
List Your Expenses
Make a list of all your monthly expenses such as mortgage payments, utility bills, car payments, insurance payments, club memberships, groceries, and entertainment. Also think about any one time expenses you will incur in the short term.
Add It All Up
If the money coming in outweighs your outgoing expenses, you’ll have a surplus. If your expenses outweigh your incoming cash then you are in a budget deficit. This means you’ll need to make some adjustments.
Make Adjustments in Your Personal Budget
Think about where you can cut back on your spending and what sacrifices you can make to achieve your financial goals. For example, could you get by without going out to eat at a restaurant every week? Or do you really need all those extra cable channels?
Some cut backs will be easy. Some not so easy.
You may also need to make adjustments every few months depending on how it all adds up.
Now that you know the steps to create a personal budget you can start yours now. You can find many budget templates online to help you out. Find one that works best for you and that you’ll be able to actively use and stick to.
While you might feel burdened and disappointed too look at your expenditures so closely, remember that starting a budget today will help you achieve your financial goals in the years to come.