Stop Ignoring It & Take Control Of Your Money Today
Source: mobile-cuisine.comCreating a personal budget seems like a daunting task at first. There are so many different expense categories to take into account. Without having previously tracked your expenses, it may be difficult to gauge a budget for each category, and you could set yourself up for a lot of stress if you overspend somewhere. On the other hand, creating and sticking to a personal budget is incredibly rewarding, and allows you to pursue major goals that improve your quality of life. Fortunately, the process of creating a budget can be simplified.
It is important to begin by defining the goal of your budget. Are you saving for a deposit on a house? Paying off credit card debt? Looking to build your savings as part of being generally financially responsible? Set a goal that is SMART. This will paint an accurate picture of your required monthly savings. Remember that debt should almost always be paid off before creating savings, as interest rates on debt tend to be higher than those for savings.
With a goal in mind, it’s time to examine your monthly income. For this budget, use four weeks’ take-home pay as your monthly income. Being conservative with your monthly income means that you are always prepared for the worst-case scenario. When February rolls around your budget won’t be exceeded, and it creates a small financial cushion in other months that, over the course of a year, adds up to 4 weeks’ extra pay.
Once your monthly income is defined, look at your mandatory expenses. Anything that is necessary for your health, safety and income is considered a mandatory expense – for example, housing, utilities, food, insurance, transport, and necessary work-related expenses. These categories should be accounted for first, as there is no way they can be avoided or reduced. A good rule of thumb is that your monthly housing expenses (rent and utilities) should not exceed 30% of your take-home pay and car-related expenses should not exceed 15%. If you are exceeding these amounts, you should seriously consider relocating or sharing expenses with others e.g. getting a roommate or carpooling. You should also include any mandatory debt payments in this category, such as minimum credit card repayments.
Source: www.allinclusivetraining.orgWith mandatory expenses set aside, it’s time to set aside the savings necessary to reach your goal. For example, do you want to save $20,000 over two years for a deposit on a house (or pay off a $20,000 debt over the same period)? If so, you need to set aside at least $833 per month. Ideally, you will be able to budget a 10-20% excess on what is required for this category so that you have extra savings for unforeseen expenses.
With mandatory expenses and savings set aside, you should look at your discretionary expenses. These are categories such as entertainment (restaurants, movies, alcohol, hobbies), clothing, cable TV and shopping. Categories like Cable TV are a fixed cost every month, which makes them very easy to budget for. Conversely, expenses in other categories (e.g. clothing) are less frequent and in irregular amounts; it may be helpful to look at estimated quarterly costs and then divide them by three to find a monthly cost.
It’s crucial that savings take priority over discretionary expenses. After all, your goal is the reason you’re creating a budget in the first place. Without these savings, creating a budget is a pointless exercise.
Note that groceries play an interesting role within one’s personal budget. They are a mandatory expense in the sense that they are required for one’s health and safety, however they are discretionary in the sense that the quality (and cost) of most groceries doesn’t significantly affect health and safety. Take a look at the average cost of a day’s eating over the last few days, substitute any luxury foods (eg fine meats) for cheaper alternatives, and then multiply by 30 to get an approximate monthly cost.
It’s essential that you track your spending. This can be done using tools like Excel, for which there are many budget templates available free online. There are also a host of other purpose-built tools available online, with both free and paid options. You could choose to keep your receipts and enter your expenses at the end of each week, or it may suit you better to enter all expenses at the time the cost is incurred.
Make sure you review your budget monthly for your first few months. Track spending in each category to see where you are exceeding budgets and where you are saving extra money. If you can tighten up your budget in each category, you will be able to more aggressively pursue your financial goals. You could save for a larger house, or pay off a debt faster to reduce interest costs.
If you are exceeding your budget in any of the discretionary spending subcategories, it can be for one of two reasons. Either you have set your budget too low, or you are making unnecessary purchases. Make an honest examination of your expenses to see whether you could reasonably reduce your expenses in this category; for example, using cheaper brands of groceries or reducing clothing and shopping expenses. If not, you need to re-allocate your budget from other subcategories in order to accommodate these expenses.
You will likely need to continue tweaking your budget monthly for at least 3-4 months until you become comfortable with it. If you are conservative in your income/expenses estimates and err on the side of being frugal, it will be much easier to re-adjust your budget with the extra savings you create for yourself.
Creating (and sticking to) an accurate personal budget is certainly not an easy task, but following this process will give you a framework that allows you to tweak your budget so it works for you. Ultimately, having the ability to pursue your financial goals will create happiness far outweighing the challenge of maintaining your budget. All it takes is a bit of discipline and focus. Good luck!