A personal budget is essential to check and balance your spending and reach your goal of financial independence. If you don’t know where your money is going, how do you save or invest for the future? A budget is important for setting your financial goal and finding where to change accordingly. In this post, I will demonstrate how easily you can create a personal budget.
I will also share some FREE ready-to-use templates that you can download.
Financial goal
Set a financial goal. Decide what you want to achieve. Your goal could be a short-term or long-term goal. For example, short-term goals include paying off debt, taking family vacations, and downpaying mortgages. Usually, the time frame should not be more than five years. Long-term goals consist of five years to decades. It includes saving for your retirement or buying a home.
Track all of your income and expenses
First, you need to track all of your net income from your salary job, side hustle, dividends, tips, bonuses, and any other source of income. Why is net income here? Your take home income after the tax and all other deductions. If you have irregular income, for example, you are a gig worker, you can take the average over a time; it could be an average over quarterly or half-yearly.
Second, track all the expenses or spending. Track the expenses for at least one or two months and categorize them into major categories. Categories will give a complete picture of spending. Some examples of categories are food, housing, transportation, utilities, healthcare, entertainment, and savings.
If you have irregular expenses, for example, yearly subscriptions, car insurance and maintenance costs, property tax or holiday gifts. You should take the average over 12 months and include it in your monthly expenses.
Download the template; it will help you.
Create a budget Plan
You have all the knowledge to plan a proper personal budget. There are a few popular budget strategies. You can choice what fits best for you.
The most popular one is the 50/20/30 method; 50% allocation goes to your needs, e.g. rent, transportation, and utilities, 20% to savings, e.g. retirement savings or debt payment, and 30% to your wants. e.g. eating out, entertainment. I forgot to clarify a few things here; you should understand your needs vs wants well. Need is something you can’t live without it. So, set your priorities between them.
Another method is Pay Yourself First; you set aside a pre-determined amount into a savings account, and the rest you use for your needs and then wants. Zero-Based method; every dollar allocation against your expenses first. If there is any leftover, then you put it into a savings account.
You can even do a custom strategy, For example, 30% of net income for housing, 15% for food and so on. Whatever your plan or allocation, stick to it and improve it over time.
Review and revise your budget
You will have to monitor and revise your budget month to month. Your expenses should not exceed any of the allocations. If that happens, sometimes it’s unavoidable; you should modify the allocation accordingly. It’s a continuous process. Target should check your spending, save more and reach your goal.
Extra tips
You can use some budgeting tools. There are both paid and free tools. Most paid tools are good; you can automate your spending and get insight into your spending very well.
Whatever amount or percentage of your net income you want to save, make it automatic saving.
If you want to manage them manually by paper or spreadsheet, you can use credit card statements, checking account statements, or receipts to track your spending.
Download FREE Template
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