If you don’t have a budget, you have no idea what your financial standing is. While you may easily quote your income, your expenses are another matter. It’s important to know how much you earn each month and it’s equally important to know how much you’re spending. Though it’s easy to conclude from your bank account statements the aggregate amount you spend each month, it’s the granular spending habits that can hinder your ability to grow financially. In this post, I’ll share with you how to create your own personal budget.
Establish Your Financial Goals
Track Income & Expenses
Expense tracking is just as the name suggests. A large part of your budget is documenting your spending. This enables you to accurately measure how much money is leaving your household each month. Expense tracking is very easy if you have online access to your bank account. Simply download the most recent three months of statements and enter/upload the data into a spreadsheet. Rather than spending time to create several different expense categories, separate your transactions into two categories: fixed expenses and variable expenses. Fixed expenses are those that require the same payment amount each month regardless of consumption, such as your car insurance and your rent. Variable expenses are those that monthly payments will vary each month depending on the amount consumed. Examples of this are your gas and electricity payments. Sum these two expense categories for each of the three months that you are tracking.
Income tracking is quite easy depending on where you are in your journey to financial wellness. Income may include your monthly salary, part-time earnings and any other earnings from dividends or interest bearing assets that you possess. Similar to your expenses add together your income for the three months that you’re tracking.
Be sure to take your time when you’re working on expense tracking. That’s where many people make mistakes and something that frequently happens when learning how to create your personal budget. If the underlying data is not complete and accurate then the next step will also be flawed.
Now that you have your data it’s time to perform what I like to call your spending analysis. This is done by averaging the items in your income, fixed expenses and variable expenses. The result will form the basis of your budget. That is, your average spending will show you roughly your monthly spending habit. We include 3 months in our analysis to account for outliers such as abnormally lower or higher spending. The average number will also aid in determining actions you need to take to achieve your goals. For example, you earn $1,000 per month and your monthly expenses total $800. Your goal is to save $400 per month but based on your analysis, on average you’re actually saving $200 per month. You’ll now have to use the information you have to determine what items you’ll spend less on in order to save an additional $200.
With your tracking laid out and your analysis completed you now have guidance to budget every month. Set a target on how much you’ll spend on your fixed and variable expenses each month in order to achieve your financial goals. At the end of each month tally your spending to ensure that you’re only spending the amount you have allocated. There will be some months where you end up overspending but the goal is to attain consistency and discipline.
If you do not feel disciplined enough, automate your savings by scheduling a monthly transaction that moves money from your checking account to your savings. If you use the example from before, each time $1,000 is deposited into your account, a scheduled transaction will move $400 to your savings. This way you won’t overspend but instead adhere to the budget you have created. However, be mindful when doing this as you do not want your account to be overdrawn.