5 Simple Steps to Create a Personal Budget

A personal budget is the best way to gain control over your finances and live a life free of financial stress.

Here are the simple steps to achieve this:

Step 1: Expenses

Collect all your financial information together. Anything that documents your expenses for the last three months needs to be collected. This will include: credit card statements, bank statements and receipts for any other expenses. You will use this information to categorize your expenses.

What do you spend on your home?
What do you spend on your car?
Your food?
Your health?
Entertainment?

Begin by drafting the categories and sub-categories you think your expenses will fall into. Keep in mind that you will want a budget category devoted to savings goals too. As you go through your expenses you can verify your category decisions.

Step 2: Income

Determine how much money your really have to budget with by gathering your income statements or profit and loss sheets. You can use either your net or gross income as your number, just be consistent. Also, if you choose to use your gross income, make sure to account for your taxes on your list of expenses.

Step 3: Monthly Spending

Now examine how much you spend each month on each category or sub-category. I highly recommend that you write this number down. This will help you predict how much you will spend in the future. You want your budget to be a realistic reflection of your spending habits, not a financial diet.

Step 4: Create A Budget Record

Find a method of recording your budget. This could be a simple spreadsheet where your columns are a list of your categories, your weekly or monthly available spending amount, how much you actually spend and the difference between the two numbers. Your rows will be the income and expense categories you’ve already established.

Step 5: Follow Your Personal Budget

Spend a month or two following it once you have created your budget. Keep your budget close at hand so you can track your finances closely. Review your spending on a weekly or monthly basis. Re-evaluate your budget if needed. Your budget is not set in stone and some of your expenses are variable, meaning you control how much you spend on them. For example, entertainment is variable and your mortgage is fixed.

A personal budget is nothing more than a spending plan. It is a tool to control your money and be knowledgeable and smart about where it goes. It’s your money after all, and isn't it great to have the upper hand?

Recommended: Guide to Family Budgeting

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Six Benefits of Creating a Personal Budget

A personal budget is a spending plan. It is your single best tool for knowing where your money is going and how much you have to work with. Of course, just the mention of the word budget can send even the most structured and organized person running for the hills. A personal budget, however, has several tremendous benefits. Among them are:

#1: A budget makes it easy to save and have extra money.

By tracking your expenses and income and controlling how much you spend on variable expenses, you will quite likely find that you have more money than you thought you needed. What are you going to do with that extra money? Of course the experts will tell you to save it and that’s probably a good idea, but maybe you could set aside just a little bit of that extra money to do something fun - like take a vacation or go to that five star restaurant you’ve been anxious to try.

#2: A budget saves you time.

How long does it take you to collect information at the end of the year for taxes? Even if you don’t do your taxes yourself, gathering all of those financial documents can take days and can be extremely stressful. When you have a personal budget, all of your expenses and income, including your taxes, are documented. This is particularly the case if you use a spreadsheet program or accounting software.

#3: A budget makes it easy to track, and control, your spending.

It gives you freedom from the stress of not knowing if you have enough money to cover certain expenses. It is so much better to control your finances than to let them control you.

#4: A budget can reduce family and personal stress.

A personal budget creates an environment of teamwork and communication rather than one of stress and blame. Everyone is accountable for the spending decisions made and the financial goals you’re striving towards.

#5: A solid budget makes it easy for you to make spending and investment decisions with confidence.

Have you ever had the chance to invest in something but you weren’t sure if you could? With a solid budget in place you know exactly where you stand financially and your investment decisions can be made with the right information at your fingertips.

#6: Budgets help you plan for the future with ease and confidence.

Are you saving for your retirement? If yes, are you saving the right amount or should you be saving more? Are you going to need a new car soon? If you are, will you have the money for it? A budget gives you the ability and the confidence to plan for the future because you know exactly how much money you have to work with right now.

There really is no downside to personal budgeting. It reduces one of the most significant causes of stress and it puts you in control of your money and your future.

Recommended: Guide to Family Budgeting

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