Creating a personal budget may seem challenging, especially for a newbie, experienced or out-of-college student, but it is an essential step toward financial freedom and stability. It can help you track your spending, save money, and achieve your financial goals.
However, creating a personal budget that works for you can take time and effort, plus money if you decide to engage someone to do it for you. This article will provide practical steps to create a personal budget that works for you, even if you’re a newbie or a first-time trial.
That said, the following are some of the proven steps and procedures that have worked over the years for both newbies and experts, and you’ll learn a thing or two in this article. While at this, grab a cup of coffee and read to the end.
If you’re ready to learn how to create your budget, sit tight and learn how to create a budget that works for you.
Step 1: Determine Your Income & Source
The first and most crucial step in creating a personal budget is to know your income level. Income here, we mean your salary and any additional sources of income avenues such as bonuses, fringe gifts/side hustles that you have seen deliver more than twice or thrice within a time frame.
Your income is the starting point for creating a budget since it will determine how much money you have or are available to spend, save or invest.
If you have a regular salary or a means of making money readily available, this step is relatively easy to come by. However, having a variable income can be more challenging since your thoughts would be raising money for the task. In this case, it is best and advised to estimate your average monthly income based on the last six months to a year. Doing this would give an insight into what will work and how you would be able to adjust to the new improvement you are trying to make to your finances.
Step 2: Track Your Expenses Even To the Cup of coffee you bought
The next step is to track your expenses to the bare minimum. It includes everything from your rent/mortgage, utilities, groceries, transportation, entertainment, and other discretionary and minute spending usually overlooked. It is essential to track all of your expenses, no matter how small they may seem. While at this, you may need clarification about tracking your expenses.
You can track your expenses in several ways. You can use a pen and paper, a spreadsheet, a budgeting app, or even employ a V.A. to help you keep track of your spending. It is vital to choose a method that works for you and stick with it. Speaking right will help you know what to spend your money on since the words in your mouth can restrain you from doing the wrong thing. Also, meditation will help you curb some frivolous spending and help you gain mastery of your day. Doing all these can help, but you need to categorize your expenses in order of importance.
Step 3: Categorize Your Expenses in order of importance
Once you have tracked your expenses and know where more of your money goes, the next step is to categorize them in order of importance. Categorizing your expenses in order of importance will help you see where your money is going and identify areas where you may need to cut back. Whether you are only looking at cutting short your discretionary expenses, or the below-highlighted expenses, you need to be open-minded with your partner if you have one.
Common categories include housing, transportation, utilities, food, clothing, entertainment, discretionary spending, and debt payments. Vehicular maintenance can also be categorized to help you know how much you spend on your car if you have one. You can create additional categories for clubbers, sports enthusiasts, and church lovers based on your spending habits.
Step 4: Set Your Financial Goals and be intentional about it
Setting financial goals is essential in creating a personal budget since it’s the first phase of financial freedom. Financial goals can help you stay motivated and focused on long-term financial success and strategies. Your financial goals can include the following but are not limited to:
- Paying off debt.
- Saving for a down payment on a home at your chosen location.
- Building an emergency fund to be used only on important emergencies.
- Saving for retirement at an agreed rate.
It is essential to set feasible goals and targets which are specific, relevant, measurable, achievable, and time-bound, by all means, to ensure you hit the point. For example, instead of saying, “I want to save money,” a feasible goal would be, “I want to save $100,000 for a down payment on a home in two years.” This will ensure you get your house in a location with all the amenities fully packed. If you have successfully followed through with every step above, the next thing to do is determine your budget.
Step 5: Determine Your Budget
After categorizing your expenses and setting your financial goals, it is time to determine your budget. But first, let’s define a budget;
What is a budget?
A budget is a plan that allocates your income to your expenses and financial goals. It helps you prioritize your spending and ensure you have enough money to cover your bills and achieve your financial goals. It also boils down to the money you allocate to your pen purchases, books, audio, and podcasts.
How to determine your budget?
To determine your budget, subtract your expenses from your income. If your expenses exceed your income, you must find ways to cut back on your spending or increase your income or means of earning. Moreso, If your income exceeds your expenses, you can allocate the excess funds toward your financial goals. And this you must take with much eagerness as you align with all your needs and desires.
Mathematically, to determine your budget, you can do the following
Income – Expense = Budget
I – E = B
where
E= Expenses I=Income B=Budget
A real-life example is Michelle’s six-month income, which amounted to $700,000, and her expenses were $250,000. A close look at this would give you this as her budget:
Using the formula above, we have
I – E = B
$(700,000 – 250,000) = $450,000
Her budget here is $450,000
When done right, you can budget your way to financial freedom, and in no distant time, your wealth and riches will manifest. The next step to determining your budget is to regularly check your budget to know if you’re on track.
Step 6: Review Your Budget Regularly to know if you’re on point
Creating a budget is not a one-time event that’s it’s continuous. It is essential to review your budget regularly for changes and trends, ideally every month, to ensure you are on track with your financial goals and adjust your budget as needed. Take your time to analyze yourself, your spending, and your dealings to ensure you hit your target.
Reviewing your budget more often than usual can help you identify areas where you overspend and find ways to cut back. It can also help you see where to increase your savings or allocate more money toward your financial goals and freedom. If you follow through with all the budgeting strategies mentioned above, remember there is also a need to stick to your budget.
Step 7: Stick to Your Budget
Sticking to your budget is the most challenging part of budgeting since humans are designed to enjoy life when they have more, but if you don’t fall back, you’ll move a mountain. It requires discipline, commitment, and sometimes sacrifice that will surely guarantee success. However, sticking to your budget is crucial and must be taken seriously.
What is the 50-30-20 rule of money?
The 50-30-20 rule has been beneficial to people globally, and it’s a way of allocating your spending in categories such as household and personal budgets. The rule pinpoints 50% of your income after tax deduction to solve basic necessities of life and 30% to items you need instantly. Still, it makes your life easier and smoother, and 20% is for a down payment on a debt or personal savings. Most individuals save 60% of their earnings no matter what comes their way; they prefer to save before getting any pleasurable investment. Many people usually call this pay yourself first.
What are examples of personal budget?
A personal budget is simply funds allocation or how you spend your money or income. A good example of personal budgets is utilities, housing, transportation, and groceries, to mention a few. To have a more profitable living, you can reduce your debt rate and credit cards and save more for your retirement.
What is the 40 20 10 rule?
The 40 20 10 rule is similar to what we discussed earlier on the 50 30 20 rule, but in this case, 40% of your earnings or income is set aside for savings purposes. 30% of your earnings or income is allocated to your discretionary spendings like travel and hobbies, and 10% of your income goes towards donations and charity. Even if you’re a small business owner or an individual with a zest for impact, this rule will help you gain financial freedom while helping humanity.
What are the 7 steps in creating a budget?
Seven steps to creating a budget are akin to what we discussed above, and to bolster this, we have:
set achievable goals
pinpoint your earnings or income and expenses
differentiate needs from wants
design and clarify your budget
get to work on your plans
immediate expenses
look into the future
Key Takeaways
In conclusion, creating a personal budget that works for you requires a genuine and high commitment to understanding your spending habits, setting realistic financial goals, and making necessary adjustments as your circumstances change.
By following the steps outlined in this article, such as tracking your expenses, prioritizing your spending, and creating a savings plan, you can take control of your finances and build a foundation for long-term financial stability.
Remember to review and update your budget regularly to ensure that it continues to meet your needs and helps you achieve your financial goals. With dedication and discipline, anyone can create a budget that works for them and take charge of their financial future immediately.