How to Make a Personal Budget
Living within your means is an important step toward long-term financial stability, and knowing how to make a personal budget is critical. If you are concerned about your cash flow, outstanding debts or saving for your future, a budget helps you stay on top of your financial situation. A budget helps you identify how you spend money, set financial goals and track your spending to ensure that you achieve them. Making a personal budget does take some effort, but once you get in the budgeting habit, you're on your way to financial security.
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Things You'll Need
- Ledger or notebook
- Pen or pencil
- Computer budgeting software (optional)
Instructions
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Determine your your monthly income, after taxes. This is your net income -- the money you have available to spend. Income sources include wages, interest or dividends, pensions or alimony.
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Write down where you spend money. Do this for a month or two, recording every purchase so you know precisely what you spend your money on. This is a critical step, and the results may surprise you.
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Start to categorize your expenses for your budget. Some common categories include rent or mortgage, groceries, utilities, cable TV, insurance, auto payment and entertainment. These categories tend to occur every month, and your budget can help you plan for them. Other personal expenses, such as gifts, auto repairs or new appliances, should be noted and can be planned for, too.
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Total your recurring monthly expenses -- any payments that know you will spend every month. Some of these, such as food and utilities, vary with usage. Others, such as rent and insurance, tend to be the same from month to month. Identify the ones that you know vary. Your two months of tracking expenses will point these out right away.
The money to pay these expenses is encumbered, meaning you must make the payments, or you could have your utilities turned off, lose your home or starve. Other than cutting back a bit, you don't have a lot of influence over how this money is being spent.
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Check to make sure that your encumbered expenses are not greater than your net income. If they are, your budget shows you don't have enough money coming in to break even. You will need to seek more income, such as adding roommates, reducing utility expenses, driving less or getting a second job.
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Total your flexible expenses, such as entertainment, snack foods or designer clothes. This is where you have the greatest ability to influence spending.
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Subtract your encumbered expenses from your net income. What is left over is the amount you can afford for flexible expenses and savings.
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Use the information you've collected about income and spending to design a budget that is easy for you to read and track your income and expenses. Use a ledger or notebook, or consider using computer software. Record each income and expense.
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Look for areas in your budget where you can cut back on spending to create more savings -- such as cutting magazine subscriptions, eating out less or downloading less music for your iPod. Set goals, such as putting away 10 percent of your net income as savings.
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Tips & Warnings
For expenses that don't occur every month, estimate what you might spend annually, divide by 12, and add that number to another encumbered savings line. This way, when you are ready to make the purchase, you will already have the cash and not have to borrow money.
References
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