How to Develop a Personal Budget to Plan Savings
The key to personal wealth is to live within your means and spend less than you earn. As simple as it sounds, it is difficult to do without a personal budget that has a savings plan built in. In 2006, Bankrate interviewed Howard Dvorkin, president of Consolidated Credit Counseling Services. Dvorkin said people do not know how to create a proper budget because high schools do not teach it and families do not like to talk about it. However, with planning, you can create your own successful personal budget to increase your savings.
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Instructions
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Record what you spend for one month. You can do this with paper, pen and calculator or on the computer with a spreadsheet. Do not neglect little things like coffee or a soda from the soda machine. Include everything, even purchases made with a credit card. At the end of the month, group your items into categories such as rent/mortgage, utilities, eating out, groceries, insurance and phone. Add all your expenses to get your monthly total.
Example:
Rent: $700
Groceries: $295.09
Utilities: $100.34
Phone: $89.93
Insurance: $300
Eating out: $112.34
Clothing: $59.95
Entertainment: $66.70
Credit card interest: $24.80
Savings: $50
Total: $1,799.15
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Add your income for the month. Your monthly income determines how you will budget.
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Subtract your expenses for the month from your month's income. Hopefully, you will have an amount left over to add to your savings or emergency fund. If your result is negative, it means you are spending money you do not have. Bank of America recommends saving 10 to 15 percent of your income.
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Analyze your monthly expenses to see what areas you can cut back on to increase your savings. Areas such as clothing, eating out and entertainment can usually be cut back slightly. Try cutting $20 off each of those areas and, after one month, analyze your spending again to see if you can cut back even more. If you cut $20 from three categories, you will be saving $60 each month or $720 each year.
If you are spending more than you have, you need to carefully look into your spending habits to see what areas can be cut completely and what areas can be dramatically decreased. Ask yourself: "Can I live without it?" If the answer is "yes," cut it out of your budget for next month. Do your best to get your expenses below your income.
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Decide on the types of savings you want to have. Do you want to save for short-term goals such as buying a car or going on vacation? Or are you looking to save for long-term goals such as buying a new home or saving for retirement? Allocate a certain amount to each of your desired savings goals. The extra amount you have at the end of the month determines how much you can allocate.
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Set up a savings account if you don't already have one. Your savings account will grow with time and the more you put into your savings account, the more interest you will earn. Consider setting up an automatic transfer to move your allocated savings funds into your savings account every month.
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Stick to your budget. Practice self-discipline and do not let yourself spend more than the amount you have decided upon in any one category.
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Tips & Warnings
Instead of tracking what you spend for one month, you can look at your financial statements for the past year dividing the total expense by 12 to figure out your monthly expense.
Try the envelope method of budgeting if you make mainly cash transactions. After you have trimmed down your monthly expenses and have decided on how much to allocate to each category, place the budgeted amounts into one envelope per category at the beginning of the month. Each month, you cannot spend more than what is in each envelope for that particular category.
References
- Photo Credit budget, payment allocation image by Kalani from Fotolia.com
