If you want to control your spending and meet your financial goals, then you need a financial budget. How to create a quick and easy personal finance budget? In the following article it will be reviewed in full!
A personal or family financial budget is a summary that can track and compare income and expenses over a period of time. This period is usually determined in one month. Meanwhile, the word “budget” or budget itself is often associated with limited spending. However, budgets don’t have to be restrictive to be effective.
On a budget, you will be shown how much money you have, then compare it to the required expenses, such as rent, mortgages, debt, entertainment expenses, etc. Instead of seeing a budget as negative, you can use it as a tool for achieving financial goals. (Read also: The importance of financial goals for investments)
What can you do on a budget?
Before knowing how to make a personal or family financial report, it would be nice to know in advance what the functions of this budget are.
A written monthly budget is a financial planning tool that allows you to plan how much money you will spend or save each month. A monthly budget also allows you to track your spending habits.
While making a financial budget may seem like an interesting activity (to some it might be scary), it is an important part of maintaining your personal / family finances. How come? This is because the budget is in the balance.
If you spend less in one post / area, you can spend more in another post / area. Save money to be able to shop in bulk, increase savings, and invest to create wealth. (Read also: The most fundamental investment methods and types of investment)
This financial budget can only work if you are honest about your personal income and expenses. To know how to create an effective personal financial budget, work with detailed and accurate information about your income and expenses.
Eventually, the final result of the financial budget will show where the money is coming from, how much in each area, and where the money goes each month.
How to create a personal financial budget in 6 simple steps
Before you start creating a personal or family financial budget, look for a good budget template you can use to compile your income and expense figures.
While you can use the conventional pen and paper method to create a budget, it’s much easier and more efficient to use spreadsheet monthly budget or financial budget app.
The template contains fields divided into income and expenses of different categories. Aside from that, there’s built-in wording that helps you know the most or the least of your financial budget with minimal effort.
# 1 Collection of personal or family financial records
The first way to create a personal or family financial budget is to collect all financial reports, including:
- Bank statements
- Paycheck for the last 3 months
- Last bill
- installment / account statement
- Credit card bill
- Investment account
Of course, you should have access to any information relating to income or expenses. One of the keys to creating a personal financial budget is to create a monthly average. The more information and more detailed you get, the better.
# 2 Income / income calculation
How much total income do you have each month? If your income is a monthly salary where taxes are automatically deducted, simply use the net income amount. If you are an entrepreneur or have regular extra income beyond your salary, include that as well. Basically, it records this total income as a monthly amount.
If you have variable income, such as from a secondary job or freelance, consider using your lowest income from the last year as your basic income when budgeting. (Also Read: 3 Ways To Get Steady Additional Income From A Home Business)
# 3 Make a list of your monthly expenses
After income, the next way to create a personal financial budget is to write a list of all the expenses for the month.
These releases include:
- Home loan payments
- Vehicle installment payments
- Cost of consumption / food
- Personal care
- Transport costs
- Costs for children’s education
- Eating out
- Travel expenses
You can use receipts, credit card statements from the last three months, bank statements, etc. to identify all expenses.
# 4 Determine fixed and variable costs
The next important point is to determine which includes fixed costs and variable costs. Fixed expenses / expenses are compulsory expenses that must be paid in the same amount every month. These costs include internet services, car payments, home payments, credit card payments, or other expenses which tend to be the same from month to month.
If you plan to save a fixed amount of money or pay off a certain amount of debt each month, include savings and debt payments as a fixed cost.
Meanwhile, variable expenses / costs are types of expenses that will change from month to month. Included in the variable costs are:
- Eating out
If you don’t have an emergency fund, enter a category for “other expenses” that may appear this month. (Also Read: Find Out How To Create This Personal Emergency Fund!)
No less important in creating a personal finance budget is determining the value of expenses for each category, starting with fixed costs. Then, estimate how much to spend each month on variable costs.
If you’re not sure how much each category is spending, review the past two to three months of bank or credit card transactions to make a rough estimate.
# 5 Summarizing your monthly income and expenses
The next step on how to create a personal financial budget is to add up your monthly income and monthly expenses. If the income is higher than the expenses, this is a good start. This means you can invest extra money in budget areas, such as saving for retirement or paying off debts.
Also, if revenue is greater than expenditure, consider adopting a “50-30-20” budgeting philosophy. In this philosophy, “needs” or essential expenses should represent half of the budget (50%), wishes reach 30%, savings and debt repayments reach 20% of the budget.
On the other hand, if your expenses are greater than your total income, it means that you are too extravagant and need to make some adjustments.
# 6 Make cost adjustments
The final step on how to create a simple personal finance budget is to make changes to the costs. If you find yourself in a situation where your expenses are higher than your income, look for areas where variable costs can be cut. Look for items that can reduce expenses, such as dining out, entertainment, etc.
If your total expenses are significantly higher than your income or you have significant debt, reducing variable costs may not be enough. Cut your fixed expenses and increase your income to balance your budget.
Try to keep the income and expense columns balanced. This means that all income is accounted for and budgeted for certain spending or saving purposes.
How to use a personal financial budget
After knowing how to create a personal financial budget above, you need to track and record expenses in each category. Ideally, you should log every day of the month. To make it easier, you can use spreadsheet or financial budgeting applications that are often found.
Keeping a record of everything you spend during the month will prevent you from overspending. This will help you identify unnecessary spending or problematic spending patterns. Take a few minutes a day to record your expenses instead of postponing them to the end of the month.
The envelope system can be used if you are unsure about creating a personal financial budget. Shopping bags must be separated by expense category. If the bag is empty, it means stop spending in that category.
When using a budget, pay attention to how much you have already spent. If you have reached the spending limit for a certain category, stop spending type in that month. Or move money from another category to cover additional expenses.
The purpose of using a financial budget is to keep your expenses equal to or less than your monthly income.
Personal Finance Budgeting Tips
Once you have prepared a basic personal financial budget, adapt it to your financial situation and future goals. Here are some budget tips.
- If you’re working on commission, save aggressively to cover times when finances are tight.
- If you are having cash flow problems because you only get paid once a month, divide the payments by week. Keep the cash planned for the next week’s purchases in a separate account.
- Pay by credit card only if you have money to pay at the end of the month. Otherwise, the effect of the credit interest will be felt every month.
- Adjust your budget every month if you feel your spending is too high or low. Keep an eye out for large expenses that only happen during certain months, such as insurance payments.
- If there is a tendency to overspend on a particular category, switch to a cash-only budget.
- If expenses are less than income, budget for savings before increasing expenses.
- Take the time to learn other financial skills to improve your financial literacy and make money work harder for you.