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Why a Personal Budget?
A personal budget serves as a plan to properly allocate the amounts of money that you have or receive into the savings, costs, and expenses of your life. Please note that I mention savings first since you should pay yourself first. This payment represents your life savings for your future, for example, retirement.
When should I start my personal budget?
The answer: right now, if you are in college or working, this is the time. Your personal budget should not wait. Budgeting your life could help you achieve your personal goals faster and most likely without economical hardships.
I do not make enough money…
It does not matter; right now, with the money that you make, you have to live your life. Putting together a budget does not relate to how much money you have but how you use the money. Thus, you have to start by knowing what you want to accomplish with your life. Remember, this is not a measure; if you are, or feel, successful, that is another topic. We want to work today with the money that we have.
Start by developing your life plan
Before we prepare a budget, we want to write certain personal goals that we expect to achieve in a certain time. Then, prepare a list and the expected date for completing each personal goal. For example, you could:
- Payoff student loans in 3 years (instead of 7 or 10 years)
- Payoff credit cards years (instead of paying monthly minimums)
- Purchase a home in 2 years from today
- Buy a new car 6 months from today
- And so on…
I mentioned four of the most common personal goals that people have. Most people do not mention savings for retirement; that should be the #1 priority for every person.
Money/funds that you receive
Your funds represent the sources, your income, say salary, professional services, business income, passive income, pension, or retirement income; as such, this is money that you have that you can count on. Do not count on expected money unless it is recurrent every month or frequent enough to count as certain. Any other funds (not certain) should not count as sources. Once you have your sources, add them up to know your total income.
Savings
Multiply your sources by 5%; start with an amount that you can set aside. Use a 5% rule to commence your new budget planning. As time passes, you can increase the percentage to 10%, 15%, or even 20% if your situation allows it. Keep savings at the top of the list, and do not withdraw or plan to use the funds. Try to deposit in a bank or a money market fund or any investment that yields a return for your future benefit.
Loans, and/or Credit Cards
Most of us have debts in the form of loans and/or credit cards; thus, we must pay them. In our budget plan, we must account for debts, review for unused credit cards or lines of credit, if you have some, and start asking the financial institutions to settle/close those available credits. Put the debts in order so you start planning to pay the cards with less balance up to the largest one. Remember, always keep one or two credit cards available for emergency travel or use.
Basic Expenses
The remaining percentage (95%) needs to be divided between needs and wants. A need represents a home, utilities, clothing, food, transportation, and anything necessary for basic survival. Needs represent our basic expenses, those that we need to cover or fulfill. We need to make a list of those and state the amount necessary to cover them. Use common sense and use realistic amounts; remember this budget plan only represents your plan, nobody else’s.
Other Expenses
Any expense that does not fall in basic expenses (needs) then becomes a want or other expense. These are the extras, the ones that we can live without, but for some reason, we want them around us, over and over. If you look carefully into your credit card expense details, you will note that a major percentage of your expenses correspond to this category. A budget is about measuring and controlling; therefore, you must choose and cut certain other expenses to improve your financial condition.
Remember what we want to achieve; cutting on other expenses most likely will allow you to pay off your credit card debt faster and increase your savings for your plans. Do not feel guilty for not spending on theaters, bars, restaurants, and other amenities as often as you did; these are other expenses, meaning they are not a necessity. Look at that. I mention “as often”; therefore, our plan does not shut down our life; it just modifies it for our betterment.
Conclusion:
A budget represents a financial plan to measure and control sources and uses of funds. In personal finance, there is no perfect plan or one plan that fits us all; instead, it should address our needs and wants based on our reality.
Every change brings a challenge; do not desist or void your budget; follow it and believe in yourself. Once you become disciplined on your budget, your financial success will become inevitable.