For most people, the mention of the term budget conjures up images of frugality and the overwhelming task of crunching numbers. However, contrary to the widely held view, a budget is the cornerstone that will help you to create a solid financial foundation. Setting up a personal budget allows you to understand how much money you have and where it gets spent.
So to start with, what is a budget?
Well, the definitions of a budget vary with the scope of the entity. But, simply explained, a budget is an estimate of revenue and expenses over a specified future time frame.
Essentially, it is a financial plan.
In personal budgeting, the first step is to know how to plan a budget.
Below, we’ll look at the basics involved in preparing a personal budget.
1. Start With Your Income
The first step in preparing a budget is to determine your income. If you are preparing a monthly budget, start by establishing your monthly income.
What is your income per month?
If you are salaried, figuring out your monthly income is simple because you only need to look at your payslip.
If you have any other sources of income, include them in the computation.
If you are married, include your spouse’s income, too.
For freelancers and business people, the law of averages will be the only applicable solution to determining your monthly income. Ideally, you’ll focus on your last year’s income to determine the monthly average.
The average figure you get will be the baseline income amount you’ll use in preparing your monthly budget.
2. Track Your Monthly Spending
The importance of personal budgeting is to ensure that you spend within your limits and probably save something for the future. So, with your income figure at hand, you should now ascertain your expenses.
Start with the regular expenses and any fixed payments you make each month, such as rent, mortgages, insurance, debt, etc.
Having listed all your fixed payments, delve deeper and establish where your money goes.
Preferably, use your bank statement, chequebook or receipts from other channels of payment to help you. Figure out how much you spend on utilities, subscriptions, groceries, and so on.
3. Create Your Budget
Once you determine your income total and expenses totals for the entire month, the remaining step is very easy. You only need to subtract your expenses from the income.
Typically, you will have some money left, which should be used to establish an emergency savings fund.
However, in some cases, especially if you are preparing a personal budget for the first time, you‘ll realize that you have a negative balance.
The main importance of budgets is to help you detect any deficiencies. So, if you realize that you have a negative balance, you need to adjust your spending habits.
4. Build an emergency fund
If you are a freelancer or self-employed, you know the swings in incomes you seasonally experience – sometimes you are at the peak and at times you are at the trough.
So, with a proper personal budgeting plan, you will build an emergency fund to cushion during the trough periods.
Usually, when you start budgeting, you may not have a lot of extra cash, but if you work with a robust budgeting plan, you’ll achieve your financial goals.
Whether you are self-employed or working for someone else, with the above personal budgeting basics, you can achieve financial freedom.