Personal Budgeting
Why It’s Important
- Develop better financial habits.
- Relieve emotional stress.
- Assist you in achieving your financial goals.
- Identifies and defines your financial goals
- Manages your money
- Directs your money flow
- Increase your savings
- Avoids spending money unnecessarily
- Achieves your personal goals
A budget is a plan for managing your money in a way that best meets your personal needs and wants.
Seven Keys to Effective Budgeting
- Identify and develop personal goals
- Evaluate and record current trends, both income and expenses
- Assign priorities
- Develop a time line for the month
- Keep it simple
- Remain flexible: “One size does not fit all”
- Review and revise
- Adjust plans, activities, and spending as needed
- Spend money cost-effectively
- Reach the specific goals you have set
- Strengthen internal control system
INCOME
Simply any money earned or contributed to your household from either personal finances or a business.
EXPENSES
Money that you spend, this includes anything you purchase. This includes both planned and unexpected expenses.
Steps in Budgeting
- Set financial goals
- Estimate your income
- Record what you spend
- Budget for actual and unexpected expenses
- Review and evaluate monthly
- Identify and write them down
- Long term (1-5 years)
- Short term (within a year)
- Make then achievable, practical, and owned by everyone
- Keep them in the fore front
- Journal the process
- Celebrate their completion
- Write them into your monthly budget
- Adjust them as necessary
- Make a list of each income stream that you receive on a regular basis each month. The key is to only include that income you get every month.
- Include both monthly wages earned from your job(s) as well as monthly supplemental income (i.e. child support, disability, etc.)
- Mark down the date these are received
- Calculate the monthly income total
- Record, but do not include any periodic income you may receive at this point.
Record What You Spend
- Review the previous month’s check book ledger, bank statements etc. and record you’re spending and income.
- Record what you spend for the next month and write down what your actual expenses and income
- Actual Expenses:
- Rent or Mortgage
- Car – payment, upkeep, gas, etc.
- Insurance (health/medical, life, auto, home, et.)
- Food
- Household utilities
- Clothing
- Entertainment
- Else
- Student loan payments
- Insurance payments
- Entertainment (movies, books, magazines, toys, cable TV, Internet access)
- Income taxes in addition to those withheld from your paycheck
- Child care
- Medical bills
- Savings (transfers to savings account, retirement fund or brokerage account)
- Vacations
- Variable Expenses:
- Unexpected Expenses
- The FIRST step is to create and maintain an Emergency Fund.
- Initially the Emergency Fund should be $500 - $1, 000 depending on your income and debt load.
- Eventually you need to increase this to 3-6 months’ worth of income.
- Develop the attitude that this is ONLY used for EMERGENCIES (unemployment, unexpected medical needs or any other financial crisis).
- Should you have to use money in this fund for an EMERGENCY the priority for the next month is to re-supply the fund.
Surplus occurs if you have a positive cash flow
Deficit occurs if you have a negative cash flow
Discretionary Income is the money you have left over after paying for essentials. Discretionary Income is used to evaluate the strength of a person’s income. Represents the money you can spend on wants.
Practical Budgeting Tips
- The budget must BALANCE
- The income must equal the expenses. If you make, you must have a ‘destination ‘for that money!
- That does NOT mean you MUST SPEND it. Planning to put money in some type of savings account is a GREAT idea.
- The Income MUST EQUAL Expenses!!
- Plan carefully
- estimates should be based on some data
- cover all expenses
- Be practical
- Be flexible
- Write your budget down
- Be able to access your budget data easily
