What is Personal Budget and how to create it to manage your money

One thing most of earning people facing today in India is that he is not able to manage his earning properly. With credit card and other loan providing institutions, we are seeing it as a major issue but in the long term we have to think of it. We have to manage our money in more systematic way. Generally, budgeting is considered as negative by most of people. Why I should have to track small expenses, I am too young to think about retirement, I am enjoying my life, and other excuses will be given by people to avoid budgeting.

We think personal budgeting is great way to manage your money and to take yourself to financial freedom

Personal budget Definition

A personal or household budget is an itemized list of expected income and expenses that helps you to plan for how your money will be spent or saved as well as track your actual spending habits. However, a budget is really just a tool—and a great tool at that—to gain better and more accurate insight into your spending habits.

By listing income from all sources against all of your monthly expenditures (from compulsory expenses like loan or rent payments to spending like eating out or going to the movies), you get a true picture of your personal cash flow, which will allow you to make better and more informed financial decisions. An accurate budget will also help you to better understand what you can and cannot afford.

Steps to create personal finance

Over the course of the month, track your income and spending. If you are salaried and you have only one income, it will be considered as your net income but if you have income from multiple sources, list out all sources and first estimate your income and then once you receive it, your total net income will be available to you.

On the other hand list down all your expenses in that particular month. Expenses may include rent, loan repayment, utilities, car payment, insurance, groceries, etc.  Expenses may vary every month but you can track it and check if it is below your income or not

Every month your expenses should be below your income. Initially, it will be difficult to track and manage but the benefits are enormous

The following steps can help you create a budget.

Step 1: Note your net income

The first step in creating a budget is to identify the amount of money you have coming in. Keep in mind, however, that it’s easy to overestimate what you can afford if you think of your total salary as what you have to spend. Remember to subtract your deductions, such as for investment, mutual fund, recurring deposit, taxes, and flexible spending account allocations, when creating a budget worksheet. Your final take-home pay is called net income, and that is the number you should use when creating a budget.

Step 2: Track your spending

It’s helpful to keep track of and categorize your spending so you know where you can make adjustments. Doing so will help you identify what you are spending the most money on and where it might be easiest to cut back.

Begin by listing all your fixed expenses. These are regular monthly bills such as rent or mortgage, utilities or car payments. It’s unlikely you’ll be able to cut back on these, but knowing how much of your monthly income they take up can be helpful.

Next list all your variable expenses—those that may change from month to month such as groceries, transport and entertainment. This is an area where you might find opportunities to cut back. Credit card and bank statements are a good place to start since they often itemize or categorize your monthly expenditures.

Step 3: Set your goals

Before you start sifting through the information you’ve tracked, make a list of all the financial goals you want to accomplish in the short-and long-term. Short-term goals should take no longer than a year to achieve. Long-term goals, such as saving for retirement or your child’s education, may take years to reach. Remember, your goals don’t have to be set in stone, but identifying your priorities before you start planning a budget will help. For example, it may be easier to cut spending if you know your short-term goal is to reduce credit card debt.

Step 4: Make a plan

Use the variable and fixed expenses you compiled to help you get a sense of what you’ll spend in the coming months. With your fixed expenses, you can predict fairly accurately how much you’ll have to budget for. Use your past spending habits as a guide when trying to predict your variable expenses. 

You might choose to break down your expenses even further, between things you need to have and things you want to have. For instance, if you drive to work every day, petrol/diesel probably counts as a need. A monthly Netflix subscription, however, may count as a want. This difference becomes important when it’s time to make adjustments.

Step 5: Adjust your habits if necessary

Once you’ve done all this, you have what you need to complete your budget. Having documented your income and spending, you can start to see where you have money left over or where you can cut back so that you have money to put toward your goals. 

Want-to-have expenses are the first area to look for spending cuts. Can you skip movie night in favor of a movie at home? Try adjusting the numbers you’ve tracked to see how much money that frees up. You may need internet at home, but do you need the fastest available? 

Lastly, if the numbers still aren’t adding up, you can look at adjusting your fixed expenses. Doing so will be much more difficult and require greater discipline, but on close inspection a “need” may just be a “hard to part with.” Such decisions come with big trade-offs, so make sure you carefully weigh your options. 

Step 6: Keep checking in

It’s important that you review your budget on a regular basis to be sure you are staying on track.  Few elements of your budget are set in stone: You may get a raise, your expenses may increase or you may have reached your goal and want to plan for a new one. Whatever the reason, keep checking in with your budget following the steps above.

It seems to be a time consuming process initially but as u master the art of budgeting and managing money, you will see positive changes in your life. Please tell how you are managing your money and how budgeting helps you in managing money in comments.

Leave a Reply

Your email address will not be published. Required fields are marked *