We all have different types of financial goals that we want to achieve in future, it can be building a comfortable retirement, purchasing a dream home, or wealth creation. But to achieve these goals and live a stress-free life in the future, it is important to manage your money effectively. A personal finance budget is one of the best financial tools to help you in this process. It’s like a roadmap for your finances that helps you to allocate your money, track your income and expenses, and save for the future.
In this blog, we will tell how you can make your personal budget in six easy steps. So, let’s go deeper.
What is a Personal Budget?
A personal budget is a financial plan prepared to track the income and expenses for a specific period, usually weekly or monthly. It often includes a portion dedicated to saving money or investing for future goals, such as emergencies, education, or retirement.
The primary purpose of creating a personal budget is to manage money effectively, allocate resources wisely, and achieve financial goals. It is prepared on the basis of multiple factors such as income, expenses, debts, future goals, etc. Considering all these factors, a budget allows you to manage your money more effectively.
Why Is Budgeting Important?
Likewise, we say cut your dress according to your clothes, which means limit your expenses as per your earnings. Budgeting follows this idea by allowing you to manage your expenses according to your income, which makes it an important part of your financial planning. Here are some other reasons make budgeting an important tool:
- Financial Control: Budgeting allows you to monitor and control your expenses, ensuring that you don’t spend more than you earn.
- Goal Achievement: With budgeting, you can allocate your money for some specific financial goals, such as saving for a vacation, buying a home, or getting out of debt.
- Emergency Preparedness: It also allows you to set aside a fixed amount of money for unexpected situations in the future, ensuring you’re prepared for emergencies.
- Debt Management: It helps you track and manage your current outstanding debt.
- Peace of Mind: Budgeting allows you to manage your money. Knowing where your money is going and having a plan for the future reduces financial stress and provides peace of mind.
How to Make Personal Budget in 6 Easy Steps?
A personal finance budget is a financial tool that helps you control your expenses and save for the future. But to make a personal budget can be daunting, as it involves multiple processes and decisions to be taken. So, how can you make a personal budget for yourself?
By following the below steps, you can build a perfect personal budget and make informed decisions about your money.
1) Find the objective
It is impossible to predict the future, but a few basic questions need to be answered early on in life. For example, when do you want to retire? What are your plans after retirement? Do you want to buy a house? Whether you want/have children, and if yes, then what are your plans for them? List your priorities and write them down. The process of writing them down will help you simplify things, and this is known as financial planning.
Most people fail to manage their personal finance only because they do not have a clear agenda set for themselves. This practice will help you understand how much you need to save for each purpose and for how long. More importantly, priorities change from time to time, hence, change your personal financial plans accordingly.
2) Identify your expenses
Track your family expenses for two to three months to find out how much is spent on what task every month. Identify the absolute essentiantial and allot money accordingly. First make sure to pay for the fixed expenditures like home loan/ rent, car loan, utility bills etc. and then prepare a budget for the variable expenses like grocery shopping, eating out, movie nights and others. Make sure that you do not spend more than you have allotted in each of the buckets. Also, if you feel that you are spending more than you can afford, then make sure to check on the expenses especially the variable factors.
3) Separate need from want
Separating your needs from your wants is very crucial for financial freedom. There are many things that we want, but it has to match with what we can afford. It might seem easy that loans and credit cards have increased our power to buy more, but there is always a catch. For example, your car is a depreciating asset, and hence, it is always suggested that you buy in the range for which you can pay back the loan within five years. Now, with easy bank loans, it may seem that you can buy a car worth Rs 20 lakh, whereas you can afford one that costs Rs 7 lakh, i.e. you can comfortably repay this amount within five years. Probably, for your second car, you might plan to buy the Rs 20 lakh model, considering your salary and net worth will increase in the next five years.
Refrain from using credit cards as much as possible. It can completely destroy the health of your personal finances.
4) Plan ahead
There are yearly expenses from tax/insurance payment to holidays that can be planned ahead. If you keep aside a small amount every month targeted towards a particular expense, then at the end of the year you will be financially prepared for it. Often people end up taking personal loans for such purposes and keep on paying for it, including the interest rate, for the rest of the year. Simply, if we can reverse the cycle and plan ahead, then we can save ourselves from some unnecessary stress and losing money.
One of the strategies that you can use while making plans for the future is the 50-30-20 rule. This rule helps you create a personal budget by breaking your finances into three parts.
- 50% for Needs: You can allocate 50% of your income to cover mandatory expenses, such as house rent, phone bills, electricity, groceries, etc.
- 30% for Desires: You can allocate 30% of your income to cover leisure activities such as vacation, shopping, entertainment, etc.
- 20% for Investments: You should allocate 20% of your income for savings and investments. Here, you can invest in mutual funds, fixed deposits, PPF, NPS, etc., depending on your goals.
5) Emergency corpus
Even before you start saving and investing, it is necessary to build an emergency corpus. This is a fund that is set aside for emergencies and the rule is you should never touch it unless there is an emergency.
Now, how do you define an emergency? Paying your credit card bill is definitely not one of them. This money can provide financial relief during job loss, illness and accidents. The size of the fund should be three to six months of monthly expenses that is necessary to survive. Building an emergency corpus is a crucial aspect of your personal financial planning and money management.
6) Make sure to save
There is a simple formula to know how much you can afford to spend.
Income – Saving = Expenses
Fashion your expenses around this formula. Now, how do you know how much to save?
First, set aside 10 percent of your income as your retirement corpus and never use it for any other purpose, not even for your children’s education or marriage. Next set your future goals, short-term, mid-term and long-term, plans basis your priorities. Apart from retirement plan, long-term goals include children’s education plan and marriage plan etc, mid-term goals include down payment for a house or car, and short-term plans include travel, buying gadget and appliances etc.. Set aside some money as per your estimate in each of the buckets, and whatever is left, you should plan your personal budget around it.
Believe it or not, a little financial discipline can make a big difference to the health of your personal finance. Start small but start early to see your money grow exponentially – this is the best practice among all the money management rules.
What are Common Budgeting Mistakes to Avoid?
When we prepare a budget for ourselves, there are some mistakes which can be made by any of us. Here are some of the common budgeting mistakes that should be avoided for effective financial planning.
- Not Tracking Expenses: It is important to track all the expenses that you will be going to incur in the future, be they vacation expenses, appliance purchases, education, etc. Failing to track these expenses can lead to overspending and deviation from the original budget.
- Neglecting Emergency Funds: Overlooking the importance of an emergency fund can leave you vulnerable to future unexpected expenses.
- Setting Unrealistic Goals: While preparing a budget, setting achievable targets that match your income and expenses is important. It should not be unrealistic.
- Regular Monitoring: Budgeting is not a one-time process; it should be regularly monitored. Failing to adjust your budget can lead to deviation in your overall financial planning.
What are the Benefits of Having a Personal Budget?
A personal budget is a valuable tool with multiple benefits that smoothen your financial journey. Here are some of the benefits of having a personal budget:
- Financial Awareness: Preparing a budget can help you to gain a clear understanding of your financial situation.
- Saving for Goals: With the budget, you can save some portion of your income for investments to save for short-term and long-term goals.
- Debt Reduction: The budget allows you to track all the expenses that you will incur in the future. In this way, you can find the unnecessary expenses and cut them down or reduce them.
- Reduced Financial Stress: Financial uncertainty can lead to stress and anxiety. With a personal budget, you get complete peace of mind as you know where your money is going and can be prepared for any future expenses.
- Improved Decision-Making: Budgeting also helps you in making your financial decisions easier. Before making any purchases or indulging in any financial commitments, you can refer to your budget and may decide whether you should proceed or not.
Bottomline
In conclusion, personal finance budgeting is an effective financial tool that can provide financial stability and help you achieve your dreams. But remember, budgeting is not a one-time task; it requires regular monitoring, and you should be disciplined and consistent towards your budget. Sticking to your budget enables you to manage your finances effectively and have a stress-free life. So what are you waiting for, create your personal finance budget, and embark on your journey toward financial freedom.
FAQs for Personal Budget
How Much Should I Be Spending?
There is no right answer to it as it depends on the individual’s income and expenses, but in every case, your expenses should not exceed your income. Here, you can use the 50/30/20 rule to manage your spending. As per this rule, you can allocate 50% of your income to necessities such as house rent, utilities, electricity, travel, etc. And another 30% on discretionary expenses such as vacation, movies, shopping, etc. The remaining 20% should be saved and invested.
What are the Types Of Financial Budgets?
The different types of financial budgets are 50/30/20 budget, Envelope budget, Pay-yourself-first budget, and Zero-based budget.
What is a personal budget, and why do I need one?
A personal budget is like a roadmap to your financial journey that helps you track and manage your income and expenses. It is important to prepare a personal budget as it allows you to become aware of your financial condition, reduce unnecessary expenses, reduce financial stress, and so on.
What’s the best way to deal with unexpected expenses in a Personal Financial Budget?
For any unexpected expenses in future, you can maintain an emergency fund and start saving for that. You can use this fund to remain financially stable if an unexpected expense arises.
How can I save money while sticking to my budget?
You can save money by allocating some of your income to investments, such as starting SIP in mutual funds. Also, you can cut down on your unnecessary expenses.
Is it better to use cash or cards for budgeting?
You can use both cash or cards for budgeting; it hardly matters. But here, the key is to stick to your personal budget and make your expenses as per your budget only.
What’s the difference between fixed and variable expenses in a personal budget?
Fixed expenses expenses are those expenses that remain constant, like house rent, EMI, insurance premium, etc. In contrast, variable expenses are fluctuating expenses, such as groceries, entertainment, electricity, etc.
How often should I review and update my personal budget?
You should review your personal budget monthly and make changes if required. Also, if there is a change in your income and expenses, then you should update your budget accordingly.
How can I stick to my Personal Budget and avoid overspending?
You can stick to your personal budget by setting realistic goals, tracking your spending, and making adjustments if required. And you should stay disciplined with your budget.
What should I do if my budget isn’t working for me?
Identify the key issues by reviewing all your expenses and make adjustments if required. Also, you can seek professional advice if your issue is unresolved.
As a personal finance expert with years of experience in financial planning and management, I can attest to the crucial role that budgeting plays in achieving financial goals and maintaining a stress-free life. I've successfully guided individuals through the process of creating effective personal budgets, and I have witnessed firsthand the positive impact it can have on their financial stability.
Now, let's delve into the concepts discussed in the provided article:
1. Personal Budget:
- Definition: A financial plan prepared to track income and expenses for a specific period, usually weekly or monthly.
- Purpose: To manage money effectively, allocate resources wisely, and achieve financial goals.
2. Importance of Budgeting:
- Financial Control: Allows monitoring and control of expenses, preventing overspending.
- Goal Achievement: Helps allocate money for specific financial goals like saving for a vacation, buying a home, or getting out of debt.
- Emergency Preparedness: Enables setting aside funds for unexpected situations, ensuring preparedness for emergencies.
- Debt Management: Assists in tracking and managing outstanding debts.
- Peace of Mind: Reduces financial stress by providing a clear plan for the future.
3. Steps to Make a Personal Budget:
- Objective Setting:
- Identify long-term goals, such as retirement, homeownership, and education.
- Regularly reassess priorities as they may change over time.
- Expense Identification:
- Track family expenses for a few months to understand spending patterns.
- Categorize fixed and variable expenditures, prioritize fixed ones.
- Needs vs. Wants:
- Distinguish between essential needs and discretionary wants.
- Avoid overspending on wants, matching expenditures with affordability.
- Planning Ahead:
- Plan for yearly expenses like taxes and holidays.
- Utilize the 50-30-20 rule for budget allocation (50% for needs, 30% for desires, 20% for investments).
- Emergency Corpus:
- Build a fund equivalent to 3-6 months of monthly expenses for unexpected situations.
- Saving Formula:
- Use the formula: Income - Saving = Expenses.
- Set aside 10% for retirement and allocate the rest based on short-term, mid-term, and long-term goals.
4. Common Budgeting Mistakes to Avoid:
- Not Tracking Expenses: Failure to track future expenses can lead to overspending.
- Neglecting Emergency Funds: Overlooking the importance of an emergency fund can leave you financially vulnerable.
- Setting Unrealistic Goals: Budget goals should be achievable and aligned with income and expenses.
- Regular Monitoring: Budgeting is an ongoing process that requires regular adjustments.
5. Benefits of Having a Personal Budget:
- Financial Awareness: Gain a clear understanding of your financial situation.
- Saving for Goals: Allocate funds for short-term and long-term goals.
- Debt Reduction: Identify and cut down unnecessary expenses, reducing debt.
- Reduced Financial Stress: Provides peace of mind by preparing for future expenses.
- Improved Decision-Making: Helps in making informed financial decisions.
6. FAQs for Personal Budget:
- Spending Guidelines: Use the 50/30/20 rule, but individual circ*mstances vary.
- Types of Financial Budgets: Include 50/30/20, Envelope, Pay-yourself-first, and Zero-based budgets.
- Frequency of Budget Review: Monthly reviews with adjustments for income and expense changes.
- Dealing with Unexpected Expenses: Maintain an emergency fund for financial stability.
- Saving Money: Allocate income to investments like mutual funds and reduce unnecessary expenses.
- Cash vs. Cards: Use both, but adhere to the budget regardless of the payment method.
In conclusion, effective personal finance budgeting is a key tool for achieving financial stability and realizing long-term goals. Regular monitoring and discipline are essential for successful budgeting, leading to a stress-free financial life.
