To develop an effective financial plan you will need to create a personal budget. The process involves calculating your overall income and estimating your expenses. It is a powerful tool that can help you to achieve financial goals.
In the world of finance, budget has become a household issue. Every individual, company, and government creates and makes use of the budget. When we talk of how to save or how to spend money we also think of budget.
In some occasions, budget is seen as a strategy for economizing spending but it all depends on individual perspective. Creating a budget has gone a long way in helping individuals and households reach financial objectives.
What is a personal budget?
A personal budget is a purposely planned list containing an expenditure based on the available income of an individual. It comprises needs, wants, and desires to set off using the available income and can be adjusted where necessary.
Let us elaborate further, according to Wikipedia.org, a personal budget or household budget is a plan for the coordination of the resources (income) and expenses of an individual or a household.
These definitions clearly state that budget goes with making expenses and if you follow the rules of budget, you will be able to spend wisely.
For instance, the 60/30/10 rule stipulates allocating various percentages of your earnings to different expenses.
Step-by-step to create a personal budget
To achieve financial goals by creating a personal budget, first, think of the most important expenses that need prior attention. List them according to their effectiveness. In some cases where you might be confused, you might decide to list down every item before selecting the most pressing of all. When you finish identifying every expense then take the following steps to achieve your aims.
1. Identify your financial goals
What are your goals, it is like setting out priorities to achieve success in life. Your financial goals are your intention for setting aside some part of your income to build your future dream.
These goals might be long-term or short-term financial goals. When you identify your goals you attach them each time you make your budget.
Ordinarily, you might not list them among your expenses but you can comfortably group them under your savings. This means savings are also included when creating a budget.
For instance, you may have a short-term financial goal of going on vacation. To achieve this goal each time your income arrives you set aside a portion of it meant for your holiday.
Your long-term goal might be to build a house, following the steps above will provide you the knowledge you need to succeed.
2. Calculate your income
Ordinarily, careful consideration is needed before making a budget and this entails calculating your income. You might have various means of earning income like your salary, side hustle, and some investments.
Determine the total amount you receive monthly from these various sources and arrive at a concise amount. With this amount, you will be able to apply your budget rules and know how and where to assign each portion of your income. For instance,
Work salary $ 10,000
Freelance Jobs 5,000
Rentals 5,000
Stock investment 10,000
Total $30,000
Now you know that your monthly earnings when summed up amount to $30,000. A well-planned budget should revolve around this amount. Your budget may not exhaust this amount but at the same time should not exceed it.
3. List your expenses
On average, if you are to list all the expenses you would like to make you will fill more pages than is required. Then when calculated it will be more than your income, thus, you may resort to borrowing.
Therefore, to achieve an effective personal budget, list out all your expenses according to their importance. Your expenses may include rent, utilities, groceries, wardrobe, transportation, miscellaneous and more.
Also, include in your expenses the amount to set aside as an emergency fund. This is important because setting out some amount for emergencies could help you maintain your savings.
While listing your expenses keep in mind the amount on your total income. However, you may still need to make some adjustments if the need arises.
4. Specify your expenses
Like I said earlier, you can either choose to list out all expenses before selecting the most important. Or you may list them accordingly at the initial stage.
Whichever is the case start by prioritizing your fixed expenses. Fixed expenses are those that seem to be permanent and you cannot substitute them. For instance, your rent, light, or tuition bills that you must pay every month.
Then list other expense that is capable of being adjusted or subject to forfeiture if possible. Those expenses like groceries, gifts, entertainment, picnics, wardrobe, and more. When you have concluded your specification compare how much you usually spend on these expenses by using your record.
5. Put down your estimates
It is time you begin allotting the various amounts for each expenses. Remember to set aside an amount for your savings meant for your future objectives.
| Invariable expenses | $ |
| Rent | 8,000 |
| Light | 2,000 |
| Trash disposal | 500 |
| Tuition | 2,000 |
| Transport | 800 |
| Personal savings | 4,000 |
| Emergency fund | 2,500 |
| Total | 19,800 |
| Variable expenses | $ |
| Groceries | 2,000 |
| Wardrobe | 1,500 |
| Entertainments | 1,000 |
| Car fuelling | 1,200 |
| Water | 1,000 |
| Laundry | 1,000 |
| Internet | 1,500 |
| Debt payment | 1,000 |
| Total | 10,200 |
Sometimes after assigning the various amounts for the variable expenses you will find out that the price of some goods has changed.
In this case, all you need to do is find out the original price before making your estimate.
6. Make necessary adjustments
The next step is to calculate all your estimated expenses both Variable and Invariable expenses. Then having calculated your overall income deduct your expenses from your income.
If you have a positive result that means a surplus, you did a great job. Your income is higher than your expenses. Having a negative result means a deficit, your expenses is higher than your income and might lead to borrowing some funds outside.
This might negatively affect your budget therefore the best solution is to make adjustments on those unusual expenses. Better still you can find a way of earning more extra income to always have a balance or near surplus budget.
From the above table, we can clearly state that the individual has obtained a balanced budget. Your Variable expenses added to your invariable expenses give your total income.
7. Stick to your budget
You have achieved a realistic budget especially when you have a balanced result. However, if you can maintain the process and continually stick to it then you are on a road map to achieving financial goals.
8. Work towards your goals
If your aim in creating a personal budget is to reach financial goals then you must make two provisions. The first is making space for a personal savings account while the other is creating an emergency fund. With these three: budget, savings, and emergency fund you are making your way to achieving your financial goals.
Take home piece
Why do you create a personal budget? A personal budget might look simple but sometimes people ignore the reason why it is necessary to always create it. You need to understand that with it you could be able to forecast and plan your financial life. You will live an organized lifestyle and be able to account to yourself how good or bad your financial activities are.
You create a personal budget in other to keep an accurate record of your income and expenditures. It helps develop good spending habits and manage your available resources.
