Understanding how your emotions affect your financial decisions is very important. If you want to know more about my thoughts on this, please read my previous posts. In this post I will share with you how I took action and started my personal budget.
Managing Your Personal Budget
A personal budget is the best way to know where you stand in your journey to financial wellness. While many may find this activity tedious, it is essential to determine if you’re making sufficient income or where you may be over spending. Once you get the hang of budgeting and learn to use it as a tool to achieve your personal goals, it can be an activity you start looking forward to. If you can answer the three following questions confidently, you do not need to continue reading this post. However, if you are uncertain, I have four easy tips I will share.
- What is your bi-weekly, monthly or annual take home income?
- On average how much do you spend at the grocery store?
- What are your monthly fixed expenses?
- What percentage of your take home salary do you save?
Income & Expenses
While income is an essential component of a personal budget, we first start with expense tracking. If you have access to online banking, this task can be fairly easy. Ideally, you want to track 3 months of expenses placed in categories chronologically. Now that your expenses are in categories (e.g. coffee, restaurant, student loan), separate them into two groups: fixed expenses and variable expenses. Like fixed costs, fixed expenses are those where a set amount is charged/paid monthly regardless of frequency. For example, rent is a fixed cost. In contrast, variable expenses, such as your electric bill, change in cost based on frequency of use. This separation is important as it allows for easy identification of saving opportunities. Tracking your income should be a relatively easy activity. Like expenses, this can be found using your online banking account or bank statements.
The next step will require Microsoft Excel or a comparable software. These tools will be used to perform calculations that will allow for analysis of your spending habits. Notice where you spend money that you could cut back. Maybe you don’t need to buy a venti macchiato every morning at Starbucks or you can make your own lunches rather than spend $10 every day for lunches while you’re at work. To cut back on my spending, I ate breakfast at home and brought lunch to work. Spend time analyzing your spending habits and noticing where you may have spent money irrationally.
Now Let’s Budget
Now comes the best part! To achieve your short and long term financial goals you will have to determine the maximum amount you are willing to spend in each variable expense category. This can be done using a top-to-bottom approach or a bottom-to-top approach. For the top to bottom approach, determine the percentage of your salary you want to dedicate to each category. For example your needs, wants and savings ideally should account for 70%, 20% and 10% of your take home income. For the bottom-to-top approach, first determine the amount you want to save each period then work backwards to determine the maximum you can spend to achieve this.
Budgeting can be a daunting task when you are unprepared and uninformed. It is, however, a great tool to use to begin your journey to financial wellness.