About Personal Budgets
When the term "personal budget" was created, the words "personal" and "budget" were deliberately chosen. The personal budget is personal because it is a budget of the owner or individual that created it. A budget implies constraints or guidelines, which the individual is expected to follow. The following article discusses why and how personal budgets are different from business budgets, how personal budgets can be created and managed, tax considerations and the significance of having a personal budget.
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Significance
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Personal budgets are significant when the economy is good. They are especially needed with the economy is bad. When you work, you only take in so much money from paychecks, tips, commissions, bonuses, allowance from your parents or wherever you typically get money to use for your expenses. If you spend more money than you earn, then your savings dwindle down until you have a zero balance in the checking account, homes can be lost and bankruptcy may come next.
Function
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Personal budgets may be used to plan for a significant future event such as a wedding, vacation or home purchase, to plan for unforeseen circumstances, such as job loss or just to keep the checkbook balanced. Software programs, such as Quicken, can track expenses, which also make nice spreadsheets for the self-employed with separate business expenses. Excel may be used to create a simple spreadsheet for each month with debits and credits. Or online features of bank or credit card accounts may be used to view spending trends and balances.
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Time Frame
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If you do not have a personal budget, create one now. It is not too late to put one together. Once you have a budget, you can plan out future expenses based on the amount of money that you have. For example, let's say that take-home income after taxes per month is $5,000. You may need to spend $400 on food, $200 on entertainment, $1400 on rent, $300 on car payments, $150 on insurance, $300 on utility bills and $500 on miscellaneous expenses each month. Track against these assumptions using a budget.
Warning
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Once you have a personal budget, this does not mean that the work is done. The work with the personal budget has actually just begun. Be sure to continue to track expenses to make sure that spending is within the set budget. Compare the end of the month balance with the previous end of the month balance. Are you dipping into savings, or are you saving? The diligent will save by staying on top of expenses.
Expert Insight
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Personal budgets can get tricky with self-employment income and expenses or a flow-through entity like an S-corporation. Keep these expenses separate to keep the personal budget accurate and ready for tax purposes. If this describes you, then invest in budgeting software and/or a business credit card that assists in keeping these items separate. Another piece of advice: It is never too early to start considering events that may affect the personal budget. Compile projections to see how the budget may look with a new mortgage payment or just after a vacation.
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