Can we live without making a personal budget?
Yes, but just as well as you can drive a car without ever looking at the gauges on your dashboard: in either case, you’re heading straight for an accident or running out of fuel.
We often avoid creating a budget because we assume it’s complicated and time-consuming. Thankfully, creating a budget is much easier than you think. And once that’s done, managing your money just gets a whole lot easier.
What is a personal budget?
The personal (or family) budget is to your personal finances what the dashboard speedometer is to your car. It gives you crucial and essential information to manage your finances soundly, preventing you from spending up your budget.
Why do we need a personal budget?
Not only is it stressful not to know how much you will have left at the end of the month, but in addition, you risk being overdrawn and getting into debt! Making a budget allows you to achieve goals, such as managing your money better, making an important purchase or project, dealing with unforeseen events, reducing stress, etc.
Fortunately, there are simple and effective ways to create your personal budget like a pro.
Before you start creating a Budget…
It’s important that you have the right numbers on hand. For example, how much do you need on average for groceries? The more precise you are, the more your budget will accurately represent your financial reality.
Tip: Download your bank statements and credit card statements for the past few months. You will be able to easily track your expenses and associate them with the right category in your budget.
5 SIMPLE STEPS TO CREATE YOUR PERSONAL BUDGET LIKE A PRO
1. List your Monthly Income
What are your cash inflows each month? Salary, social assistance benefit, an employment insurance benefit, pension, annuity, family allowance, etc. all these form part of your income.
To create a personal budget, you need to know how much you actually earn. If you’re not getting the same pay each month, calculate your average monthly income. If it’s only sporadic income, then don’t include it in your earnings record.
Tip: Look at your last payslip and calculate your monthly income. It is simply the amount that is paid into your bank account each month, after deducting taxes. If you are self-employed, look at your income for the past 5-6 months to get a reliable estimate of your monthly income.
2. List your Monthly Fixed Expenses
Next, list all your fixed expenses. Fixed expenses include rent, mortgage, insurance premiums, car payments, etc. These figures are certain each month. It also includes utility bills – electricity, gasoline, and water expenses. Did you know that the average monthly utility bill of a family in the United States is $170?
You must take into account expenses that are predictable, but which are not monthly: gifts (Birthdays, Anniversaries, Christmas, etc) vacations, school fees, etc, so as to plan towards them. Also, include the amount you intend to put aside each month to build an emergency fund.
Remember to put in fixed expenses that are not billed monthly, like home insurance. For example, if you pay for one of your insurance policies twice a year, calculate the total amount you pay in one year, then divide by 12. Another example: If your electricity and gas bills vary a lot from month to month, add up everything you paid for a 12-month period, then divide that amount by 12, to get a monthly amount.
3. Record your Monthly Variable Expenses
Unlike fixed expenses, these figures change almost every month and are easily adjustable. These are expenses that are not essential for living, hence the name, variable expenses. There are all kinds: transportation, food (grocery store and restaurant meals), clothing, services (telephone, cable, Internet), recreation and pocket money. Also, don’t forget what you spend on others, including your pet, shopping sessions, salon appointments, gym subscriptions or even expenses related to outings. This way you make sure that all expenses are listed.
It’s by properly sorting these expenses that we can identify those that are real black holes in a budget! The goal here is to be able to estimate your variable expenses as accurately as possible. If listing your expenses seems too complicated, there are some great apps to create your personal budget and manage it too. The end goal is to arrive at a figure you can write down for variable expenses. Identify the categories where you spend the most money and ask yourself if: they are necessary to live? and which of the expenses could you reduce the cost? This sorting makes it possible to prioritize the expenses according to the needs and cut off non-essential expenses.
Finally, there are unforeseeable expenses, such as a car repair or a replacement of a household appliance after a breakage. These unforeseen expenses are why it’s important to put aside an emergency fund.
You should also save, at a minimum, 5% of your income for your retirement or for your projects.
4. Use Online Budgeting Apps to Analyse the Situation and Calculate what you have left.
Is more money going out of your wallet than it is coming in? Anyone sticking to a budget and wanting to know where their money goes most likely uses financial software. In fact, I’ve rarely seen people successful with their money without using some type of tool to help. Some good ones to try out are YNAB, Mint, EveryDollar, PocketSmith, etc. These applications help you to easily track your expenses and never lose sight of your financial goals.
Thanks to steps 2 and 3, you have calculated your monthly expenses, fixed and variable. Now, add up to get the total of your expenses. Calculate the difference between your income and your total expenses. What you get is called a disposable income.
Simply put: Disposable income = Monthly income – Total expenses (fixed and variable)
This is the money you have left after all your monthly expenses are deducted from your monthly income. Ideally, this is the amount you will use as a basis for creating your personal budget and achieving your long-term goals. For example, you could put that money aside over time to buy a house, or to finance a small retirement fund. Your goal is to increase your disposable income. But the real secret to managing your money well is knowing how to distribute the maximum amount of this reserve towards your savings.
Basically, it is the savings that must take precedence over your expenses! Pick an amount to save each month, then try to see what expenses you could reduce. We all have long shopping lists, but our disposable income is limited. So, it’s up to you to find the balance between your current expenses and your savings needs. The only rule to keep in mind is to try never to spend more money than what you earn.
5. Assess Your Finances and Make Adjustments
This is the last step, but also the most important. Take a very close look at your budget. Analyse it, study it, dissect it! Are the percentages allocated to expenses reasonable in relation to your income? Are you happy with the amount you save each month? How can you better distribute your income?
Creating a budget is not all. Sometimes you must adjust it. If you find that your expenses exceed your income, you need to take action and make adjustments. Your income must be more than your expenses. Ideally, you should be able to save money as well. Again, the goal is to make sure to balance everything. The idea is not only to have enough money to pay off all your bills each month but eventually to be able to save.
Sometimes small, simple changes can fix the problem. Are there any unnecessary expenses on your list that you could cut? Sometimes, simple, repeatable purchases can have a big impact on your budget.
- Think of your monthly income, before you make an unnecessary purchase.
- Be very disciplined. Do not spend more than you should, stick to the budget.
- Every time you are tempted to spend on impulsive, outside your budget, remember your goal.
- Be a smart consumer, think and compare before making a purchase so that it remains within your budget.
- Again, be an organized and moderate person in your expenses.
- If you have a family, teach your spouse and children the value of saving and financial literacy.
- At the end of the month, analyse if your expenses are adapted to the budget you created. Adjust your budget as needed.
Remember, “The only people who win are the people who know how to budget” warned, Luis Pazos.
Personal Budget Strategies That Can Help You Save Money
1. The 50/30/20 rule is one of the most popular budgeting strategies. It focuses on how much you spend every month on necessities, discretionary expenses, and savings. Once you’ve created your personal budget allocate your hard-earned money to the things that matter most to you. According to the 50/30/20 rule, divide your income into the following categories:
– 50% of your income for fixed expenses
– 30% for variable expenses
– 20% for savings or debt repayment.
2. You can use the envelope system to save money by categorizing your spending. When using this method, put cash in one envelope for each category of expenditure such as groceries or entertainment. Be disciplined enough not to spend beyond the content of each envelope.
And there you have it,
you now know how to budget like a pro. Easy, fast, and efficient, isn’t it? I hope your budget matches your spending and financial goals and leaves you feeling motivated. Know that it’s never too late to take matters into your own hands and get your finances back on track! Cheers to your Success.