Personal budget is a financial plan that shows an individual or family incomes and spending plan. It is the best way for anyone to take control of personal finances. Simple tool like personal budget helps you to understand where the money goes in and out of your household. The key to managing your personal expenses is to know your expenses and spend less than your income. A good monthly or weekly personal budget could help you consciously achieve your financial goals.
To create a personal budget, simply follow the 7 steps outlined below:
1. Assess your Personal and Financial situation
The first and critical point of personal budget preparation is self-assessment. Assess your earning level, spending habit and financial net worth. Assessment should also include understanding of your personal needs, values and life situations such as health, family dependent, commitments and even the general economic conditions. You cannot set a smart goal if do not know your current values and situation.
2. Set your Personal and Financial goals
At this stage it is important to distinguish your wants from the needs. This process will help you to prioritize your goals. For example if you are preparing a personal budget for one year, you need to state your goals in that one year and long term goals that would require savings in the current year. Short term goals may include paying for rent whiles long term could be higher education or set up a business in 3 years time.
Every financial goal you set should be a SMART goal: Specific, Measurable, Actionable, Realistic, and Time Framed.
3. Set out your Sources of Income
To prepare a monthly budget, you need to determine how much income you earn in a month. Where does your income comes from? List the sources of your income and the amount that comes in from each source. For example of personal sources of income would include salaries, stipend from sponsors, allowance from parents, or income from investments. For salary earners, it will become simple if you can use the net salary credited to your bank account instead of the gross pay.
4. Estimate the Expenses
Create a budget for fixed and variable expenses based on your projected income and goals. This is where you prepare the real expense budget. The budget should consider your personal situation and goals identified in step 1 and 2 above. Fixed budget will includes expense and incomes that are contractual such as house rent, loan repayment, utility bill, salaries etc. Variables needs are the non-contractual but important and it may include transport, food, entertainment, vacation, donation etc.
It will be helpful to group related incomes and expenses together. Such grouping are called income or expense category.
If you have a monthly savings target (and I think you should), include it as an expense. It is much easier to save money if you consciously planned for it in your budget. Your savings account can be very helpful, if you run into unforeseen expenses. In fact, financial experts recommended that first payment from any salary should be to pay yourself first (savings).
5. Balance the Budget and Adjust
You have to simply sum all your income and expenses. Find out if you have a surplus budget or deficit. Surplus is when your budgeted income is more than the expenses and deficit is the opposite.
This is how Basket Mouth will say it: If you have surplus, you are safe but if you have deficit, you have two things to do: Find ways and adjustments to increase your income or you should consider cutting elsewhere to keep expenses under control..
Remember a budget have to be realistic. While a budget can be a great tool for managing finances, it can quickly become overwhelming if it’s overly detailed or idealistic. Then, keep it simple.
6. Monitor Actual Income and Expenses
Take a look at your spending every month and compare it to your personal budget. Monitoring can only work when you keep record of your expenses and income. You need to record all your income and expenses as your incur them. This is a continuous stage which also require to implement your budget by avoiding non critical unplanned spending.
7. Compare your budget to what you have actually Spent.
Try to trace the variances between your actual spending to budgeted expenses. Variance analysis help you understand the categories where you spend most. It will also help you understand the extend of your success towards the set financial goals.
Any application for Personal Budget ?
The most common application for personal budget preparation is the Microsoft Excel. Other applications like mint.com also offers on a free app in the Applet Store.
Well, if you have never prepared a personal budget before, it is time you start thinking about how to manage your hard earn money. The beginning can be uninteresting for some people, however prior financial planning can prevent many problems and personal budget management is one of the tools.