5 Steps to Create a Great Personal Budget

Creating a personal budget can do wonders for an individual, regardless of his monthly income or expenses. For most, it is difficult to see exactly how much money is wasted from one month to another, until they write everything down and start calculating. This having been said, while creating a personal budget may sound easy, it is not as simple as most would think. This task requires a lot of planning, research, and a bit of discipline. The advantage is that you only have to set up the budget once, and you will be able to use the expense plan for the next several years, even if your income changes or new expenses appear.

Look At How You Are Currently Spending Money

The first step is to look at how you are currently spending money. Create an expense journal and make a note every time you spend money. This journal should include everything from what food you buy to the amount of money that you spend on transportation. This data will enable you to divide your income to keep up with important monthly expenses.

List All the Essential Monthly Expenses

Once you have collected all the necessary information, it is time to start creating lists. Look at your expense journal and select all the items that can be classified as essential, along with how much you are currently paying. Include expenses such as rent, groceries, long-term medical treatments and ongoing procedures, loan repayments, mortgages, and utility bills. This list will contain all the expenses that you will have to pay no matter what happens. This means that you will pay these first.

Look at What Inessential Expenses You Are Currently Paying

Next, you should create a list of all optional or inessential expenses that you currently have. Things like Netflix subscriptions, food that could be classified as creature comforts, should all be included here. Furthermore, this is the point where you can also add other things that you would like to buy in the near future. Again, this list should only include ongoing expenses. One-time purchases should be added in a separate list.

Factor In All Forms of Income That You Have

Figure out what your total income is. Include only stable sources of income, such as your salary, allowances, and benefits. This amount is your absolute spending limit.

Create the Budget and Follow It to the Letter

Lastly, create your budget by looking at how much you earn every month, what your essential expenses are, and how much you are left with after paying for them. The secret to creating a functional budget is to look at your income and first plan your important expenses. Once the value of these essentials is subtracted from your income, you will be left with an amount of money that you have to divide between creature comforts and your savings account. Look at your optional expenses list and select the ones that are the most important to you. Generally speaking, it is recommended to keep the cost of these under 50% of the amount that you are left with after paying your essential expenses. Lastly, direct whatever money you have left towards your savings account. Doing so will not only give you a buffer in case your income is ever reduced but will also enable you to make larger purchases in the future.

Once you’ve created your budget, it is all a matter of discipline. While it may be hard to avoid overspending at first, it will benefit you in the long run. This having been said, if an important expense ever comes up, such as home repairs or a medical bill, it is ok to disregard the budget. Emergencies should always have priority over everything else.