Many people do not pay enough attention to their money. Their paychecks go directly into their bank, and then they just spend the money until the account is empty. Without tracking their spending, it’s hard for them to balance expenses for needs and wants or to save. The big problem is that budgets are often impractical and just too hard to manage well. But, choosing a personal budget that works with the way you actually live can free you to spend your money on the things you want, achieve financial security, and build wealth.
What Makes Budgets Fail?
No wonder people get so frustrated with their budgets and give up. So often, the budget setups just don’t work. People work hard trying to stick with the budget, but there’s too little reward for it. They’re never hitting their monthly targets for spending or saving. Or, some relatively minor emergency is all it takes to break the budget. Some reasons why so many budgets fail:
- Too complicated, unnecessarily complex
- Doesn’t fit with the individual’s income and real spending
- Doesn’t reflect the person’s values and goals
- Not formatted conveniently for the individual’s lifestyle
Keep It Simple!
It’s very common for people to build elaborate budgets that are too confusing for them to use after they set them up. The most likely successful budget you can create is one you’ll find easiest to use though its framework includes all your expenses. So, to succeed, your budget needs to be
- suit your actual habits
- fit with what you value
- be easy to access and change, and
- enable you to track your spending position and progress during the month.
Should I Automate My Budget?
You do need a system for easy tracking of your bill payments and other spending. But, don’t bother with expense trackers that charge a fee or any budget calculator tools that are lead generators for businesses angling to make you a customer. If you have a lot of expenses in your budget, you could create your own or use a free budget spreadsheet program. Or, if you want to automate, you can buy an inexpensive software product for budgeting and expenditure tracking. There are a lot of good options. Just try a few and see which you prefer.
How Much Should I Allocate for Areas of Spending?
One budget guru suggests cutting up all your credit cards, investing 20% of all earnings monthly and never ever touching that, and living on the remaining 80%, regardless of circumstances. Another famous personal budget example is the Balanced Money Formula, which suggests allocating 50% or less for housing, transportation, groceries, and other needs, 20% or more for savings, and 30% on wants, like entertainment, cable TV, etc. This budget views debt payments as savings, which is an arguably convoluted perspective, but it makes the 20% savings goal seem more reasonable.
Ultimately, the amount you must dedicate to needs and can allocate for wants and savings should be determined based on what is truly realistic based on:
- Your current income
- Your current expenses
- Your spending habits
Guidelines for Building Your Ideal Budget
When you create your budget, try to stay within these general guidelines for developing a simple budget that you’ll easily be able to stick with:
- Don’t try to make a perfect budget. A budget is a plan. Expect to make adjustments to it along the way every month, and just don’t ever give it up.
- Make the simplest budget you can. Only include details you truly need. Choose a way to track your spending without being a big chore.
- Focus on reducing your biggest expenses. Little efforts like shopping at cheaper stores, reducing restaurant expenses, using coupons, etc. help save money. But, cutting the big expenses like housing costs, car payments, etc., make the biggest difference.
- Plan your budget based on your reality. Don’t budget based on a raise you hope to get or the ideal spending habits you wish you could adopt. Include what you know you’re really going to spend.
To Get Started Budgeting
There are some steps you’ll need to take to start building your ideal budget plan, including making a list of all your bills and other expenses and begin marking those you’ll pay during each income cycle, etc. But, there are a couple of things you need to do before you even start setting up your budget:
Know your total assets and liabilities.
Determine your net worth by adding all your assets, including cash on hand, savings, stocks, bonds, retirement accounts, real estate, and personal property items. Add your liabilities, such as mortgage, other installment loans due, credit card debt, etc. Calculate your net worth to see your full financial picture. (If you have a lot of student loan debt, you may currently have a negative net worth. That’s not uncommon for new grads. As you acquire more assets and pay more payments, that ratio will change.)
Know your credit status.
Repair credit problems and maintain good credit by paying your bills on time and keeping your total income to debts at an appropriate ratio. This is the key to qualifying for lower interest rates on installment loans and credit cards. Check your credit report each year or more frequently to ensure that it is updated with any loan payoffs, issue resolutions, error corrections, etc. The three primary credit reporting agencies in the U.S. are Equifax, Experian, and TransUnion. You can request a free credit report from each one every 12 months.
Personal Budget Example Template
To be successful with a budget, people usually need a way to track where the money from their paycheck is going. A monthly budget in writing that includes all your bills and other expenses can give you much better dollar-by-dollar control over the amounts of money leaving your account.
Here are instructions for setting up a simple budget that can help you track your bill payments and other expenses and adjust other spending as needed to avoid running out of money and stay on pace toward goals. Follow these easy steps to set up your personal budget:
- Monthly Bills: Use a basic spreadsheet or table to list all your monthly utility bills (electricity, gas, water, trash, cell phone, internet, cable TV, etc.), loan payments, credit card balance pay-offs, insurance premiums (home, auto, health, dental & eye, other), gym membership, donations, etc.
- Annual Bills: List annually paid bills below the monthly list. Some examples of these could be real estate taxes, HOA fees, income taxes due, personal property taxes, auto licensing, club membership fees.
- Due Dates: Include the due dates for each monthly and annual bill and the amounts due each month or year.
- Total Payments Remaining: Note in the column beside each loan or installment loan payment how many remaining payments you have left to pay off the account, and note the current date so as you continue making payments you can track the reduction in the number of payments for each account from the point you started tracking it.
- Other Monthly Expenses: Then list your other monthly and daily expenses. Include your weekly expenses for groceries, gas for your car, pet food, and supplies, upkeep supplies for your home, personal maintenance supplies for yourself (like grooming products, manicures, etc.), laundry expense (if applicable), clothing, shoes, medications, sports fees, hobby costs, recreational expenses, etc.
Add your Monthly Bills. You can sort your budget sheet by Due Dates, or Monthly Bill names.
Calculate: (You can easily do this quick match manually on your calculator. Or, if you know how to use your software program’s basic math tools, you can set your worksheet or table to calculate for you and auto-calculate every time you make changes.) Next, below your list of expense line items:
- Monthly Bills: Add your monthly Utility expenses, Loan payments, Other Monthly Bills, and Costs of Goals all together to calculate your total Monthly Expenses.
- Annual Bills: Add all your annual expenses together, and divide your total Annual Bills by 12 months to show the amount you should save each month to pay those annual bills throughout the year as each is due. Add that amount (which is 1/12 of your total Annual Expenses) as a new line item on your monthly budget.
That way, your annual expenses become part of your now Adjusted Monthly Expenses. So, you can set the amount aside each month in savings or elsewhere in an account to accumulate enough to cover each annual bill by its due date more comfortably instead of paying each yearly expense from a single month’s budget.
Budgeting for Your Goals
Cost of Goals: Budget the cost of reaching your goals. Once a year, think about your:
- Short-term goals (for this week or month). Ex: save $X amount of money.
- Medium-range goals (the next 6 months to 18 months). Ex: take a vacation, buy a new car, pay off credit cards, buy some new furniture, add business equipment.
- Long-term goals (from 18 months to 10 years or longer in the future). Ex: remodeling or buying a bigger house, getting an advanced degree, traveling around the world, investing, expanding your business.
Estimate how much you need to budget each month/year to continue making consistent progress toward those goals and add that Cost of Goals to your Monthly Expenses. (Reevaluate your goals periodically to ensure they’re still relevant and adjust your budget according to any changes you make to your plans.)
Calculate Your Monthly Net Cash
Now, at the bottom of your budget spreadsheet or other file types, you use to create your budget, add all your regular income for a typical month to see your total Monthly Income.
Finally, subtract your total Adjusted Monthly Expenses from your total Monthly Income to see your Monthly Net Cash. If this is a positive number that is large enough for your budget to bear the discretionary costs of furthering your goals, supporting your hobbies, recreational activities, etc., then you should be able to comfortably adhere to your budget. Congrats!
If not, then it will be time to make some choices about priorities, possibly earn more income by taking on additional work, and/or modify your plans by eliminating or scaling back some discretionary expenses enough to bring the budget in line with your income and allow for savings.
Managing Your Monthly Budget
Now that your basic monthly budget is completed, you can simply create columns for each month of the year. Then, as you pay your bills each month, just mark each expense line item with a symbol of your choosing to indicate that you paid it. After all your bills have been paid for the month and its column marked, you’ll have a whole column of cells filled with the paid symbol.
That means you’ve successfully met all your financial obligations, you’re improving your credit, and progressing toward your goals. Ideally, you have enough money left to put at least 10% in savings and some discretionary income in your account for whatever you want to spend it on. That’s the profile of well-managed personal finances.
A budget is just a plan made to be continuously adjusted. First, get the amounts of your NEEDS, which include routine grocery and car fuel allocations, utility payments, monthly debt payments, insurance, and other regular expenses accounted for upfront. Then, you are free to determine how much you can put in SAVINGS and how much you have left for WANTS.
Your Budget Will Set You Free!
The goal is to reduce the total monthly payments for needs and increase the allocation for savings until both are at sustainable amounts. Once those two are stable, you’re free to spend the rest of your money every month on wants. It’s much more fun and much less stressful to spend your money on what you enjoy when you know you’re managing well and can truly afford it!