A personal financial budget is a money allocation plan which is part of your financial plan enabling you to outline your financial goals. Establishing a personal financial budget is not difficult and has tremendous payoffs. You can better establish and regulate your financial resources, set and achieve your financial objectives, and make advance decisions as to how you want your finances best to function for you.
The main idea in creating a personal financial budget is to put aside a certain amount of money for expected as well as unexpected costs, based on previous expenses and bills, as well as define savings amounts in its optimal state. It therefore enables you to position yourself to build wealth in the long-term. In order to create a useful personal financial budget as part personal financial planning you must do the following:
Step 1. Determine how to allocate your compensation by first identifying your spending habits. Define fixed expenses (e.g., home, auto, utilities, insurances, etc.) thoroughly for a month and write everything down and add it all up. Even if your utilities fluctuate a little you can estimate the cost after an average month. Through proper determination of your “spending patterns”, you can immediately identify solutions for creating an effective personal financial budget for your needs.
For instance, when you have a steady monthly net income (after tax take home pay) of $5,000, you should subtract all of your identified monthly expenses from that income – making a list of the regular monthly amounts. Spreadsheets are often useful for keeping track of this information. Many people often create an excel spreadsheet budget to track expenses. There can be benefits to creating multiple year personal financial budget plans.
Step 2. Next, assess other bills, like those that may occur periodically during the year. These can be estimated and then subtracted from the amount of your income. You have one of two ways of doing this. The first way is to compute the total for a year, divide the total by 12, and subtract that monthly amount by putting the money into savings to build until you need it. The second way is if you have enough surplus you can just budget the full annual, semiannual, or other bill in full or in some other payment arrangement.
Step 3. The balance that remained after fixed costs can now be budgeted across miscellaneous household expenses and savings. Budgeting for savings is often overlooked and therefore often will not get done. A short-term 2-5 year savings goal needs a minimum 2-year personal financial budget plan so you can see where you are going. A short-term impulse buying view is often what prevents people from accumulating savings and building wealth.
Step 4. To best determine how to ensure you contribute to savings, you can do this one of two ways. You could use dollar amounts for a group call miscellaneous like gas, clothing, entertainment and groceries. Some people promote using proportions or percentages. But think about it, if your income increases, does that mean your miscellaneous expenses should or should your savings increase instead? So, using dollar amounts instead of percentages could be advantageous to your savings goal.
Step 5. Ideally you have a minimum of 3 cash or banking accounts. These expenses should be allocated across 2 checking accounts – the first for paying bills and for transferring money to at least a second checking account and one savings account ( if you do not have direct deposit across all of these accounts). The second checking account would be for your household, miscellaneous, spending money and not the recurring bills. Then a third short-term savings/emergency account (later adding longer-term savings accounts of course) but these are beginning steps that many people never put into practice.
These are ways to establish a basic financial plan and to prevent usage of non-allocated money for miscellaneous or impulse expenses. These are beginning steps that many people never put into practice that are beneficial and can be built upon, for long-term financial planning.
The topic for this article is Personal Finance Budgeting. The first step in becoming financially responsible is starting out with a personal financial budget. Absent a budget there is no way one can possibly track their income and expenses.
Before getting into what personal budgeting finances are I want to explain why budgeting is important. For this idea we will say that you have decide to startup a business, a personal financial advising firm. When establishing your financial advising firm the first thing to be done is the planning out of your company expenses. Most people would logically budget for their expenses before they began because without this financial planning you would have no idea of whether or not your financial advising firm could potentially be profitable. The next thing is to plan out your revenues. Then you would take the difference between the two and see whether things looked good or not.
This is what a financial budget is for a company and people should handle their personal finances in the same manner. When establishing a personal financial budget it is important to include everything that involves your money.
You can find personal finance software on the internet. This software is made so that you can easily enter all your income and expenses and it does everything else for you.
The components in a personal financial budget include both income and expenses. Examples of income in a personal finance budget include job income, gambling winnings, capital gains, social security, tax refund, etc… Examples of expenses in a personal budget worksheet include SAVINGS, electric bill, health insurance, cell phone, groceries, books, shoes, clothes, car insurance, gas, entertainment, travel, miscellaneous, etc.
This expense list does not include all potential expense, I’m sure you can think of others right now. Anything possible thing that you can think of that you might need to spend money on should be put on your personal budgeting worksheet.
I know that some of you are thinking to yourselves “Savings? What? Thats not an expense!” Well I’m here to tell you that savings should indeed be thought of as an expense. Each month one should personally budget for a certain amount of their money to be saved. This should not be an “if I have money left over” situation. It should be definite and as automatic as writing that check for your mortgage every month.
The most basic concept of personal budgeting is to control spending and use your money wisely so that you have money left over rather than having no money or going into debt.
After listing your income and expense on your budget worksheet you need to subtract the expenses from your income and get a Net Cash Flow for the month. The idea is to include all income and costs and come out with a positive cash flow on your personal financial worksheet. If the number comes out negative then you have a problem and your expenses will need to lowered.
Now you know exactly what a budget is and how to make one. The next thing to is run a few Google searches an find a budget template to make things easier.
You need to keep a budget every month. No, you cannot simply make one plan for the whole year and stuff it away somewhere to forget about it. Our income levels change and our expenses change and these changes need to be accounted for.
To be successful with your personal budgeting plan you need to make out a projected personal budgeting plan for the whole year. Then as each month passes you can make monthly adjustments.
The other thing to do is keep a record of your actual income and expenses and compare that to your personal financial budgeting worksheet. You want to make sure that your original estimates were correct or at least close.
The thing about a personal financial budget is that it sets you up for success and helps keep you from needing to use credit cards or other debt to make it.
If you have an accurate personal financial budget then you will be prepared for the unexpected financial burdens that happen from time to time.
There should be no issues when your car breaks down and you suddenly need $300 to fix it. All is good because you have been putting money into savings each month.
This is the most basic idea of personal financial freedom and personal finance budgeting. If you can establish a sufficient level of savings then you can begin to be at ease with your financial situation.
Most people are clueless and don’t realize that their unplanned/unwritten actual personal finance budget includes something like $4500 of income and $4700 of expenses each month.
Next time I will take a short break from the Mini Series and instead suggest a few personal financial budgeting software programs that are available out there.