A personal budget is simply a written list of expected income and anticipated expenses for a given period of time. Personal budgeting can be broken down yearly, quarterly, monthly and/or weekly. The most important thing is that it’s easy to understand and follow. The most common time frame used is monthly, so we’ve created the following step-by-step guideline to set up a monthly personal budget.
- List all anticipated income.
- List all payments with a fixed due date and the date they are due.
- List all payments with a variable due date also listing the date they are due
- Separate the debts by categories, Home, Travel, Utilities, Entertainment, Miscellaneous and Savings.
Now that you have a listing of all expenses that will need to be paid in the month. The next step in personal budgeting is to organize these so that you insure all of your payments will be made on time.
- Write out the dates of each expected pay period and when the funds will be available to you.
- Take all of the categories that you have created and subdivide them by the dates that they are due.
- Allow time for mailing and list each payment you need to make under the pay period that the funds need to be paid from. (You may have too much going out one week at this stage but that’s okay you can make changes later)
- Compare the totals of both income and expenses for each week, if there is more going out in one pay period than is coming in, you may need to try to change some of the dates that the bills are due. Most creditors will cooperate with you on this if it’s a fixed payment schedule. If the due date cannot be changed, you will need to carry a rolling balance from the previous or last pay periods. If you can see that you have more funds in an early pay period [beginning of the month] than a later one, you can carry the funds throughout the week to meet the expenses in the following weeks.
- Now that you have a layout of all of your monthly expenses in your personal budget, you can see what you need to do to make sure that you have the payments available when they are due.
- Each month you spend cash out of pocket, typically this is referred to as your miscellaneous expense category. This may be a small amount such as $20.00 a week all the way up to $100.00 a week. For this category it is recommended that a you keep track of all of your “miscellaneous” expenses within your personal budgeting. When purchases are made, keep a receipt or write it down. $5.00 for coffee and a bagel on the way to work doesn’t seem like much on a daily basis, but monthly that’s $150.00 on coffee. So keep an eye on where the miscellaneous funds are going, they may not seem worth it to you in the long run.
By using a personal budget, all the information compiled you can see where your income is being applied. At this point many consumers will see that they don’t have a plan for savings. Most of America lives paycheck to paycheck with no money for a rainy day, or an emergency. At this point ask yourself, if I suddenly needed a large sum of money for medical or any other purpose, where would I get the money? If you don’t know, than you’re in the same situation as a lot of people and that can be a little scary. This is why savings is so important, even if it’s a little at a time.
With a set amount towards savings each month, you can see how long it will take to accumulate. If you think that the savings will increase too slowly you can reduce your miscellaneous expenses to compensate for an increase in savings or any other adjustments. The key to savings is to treat it like any other bill payment. Once you take the money from your income and put it in the account, that money is gone, just like the rent check! Pretend that it isn’t even there and live off of your budgeted living expenses. If you have personal budgeting down properly, this will work to your advantage and meet your long term goals, without impacting your style of living.