How to set up a personal budget
So if you are getting round to taking care of your own personal finances, there are a few factors you should keep in mind. The first thing you should when planning your finances is to create a budget.
So, you may be wondering, what is budgeting? A budget is the calculation of your possible expenses and income over a certain period of time. It is an ongoing process that you should update at your own set time (monthly, quarterly, etc.). It helps you keep track of what your overall balance will be, where your money is spent, and where you can make some savings. Budgets are a personal tool for the person making the budget to understand their, or someone else’s, situation. As such, you do not necessarily have to share the information with anyone else, so it does not have to be an official published report.
After calculating your personal budget, you will then designate it depending on the overall outcome. When expecting profits, you would have a surplus budget. If you are breaking roughly even, you will have a balanced budget. If you are expecting to make losses, you would call that a deficit budget.
A budget can, of course, be created by many different entities, whether you want to calculate earnings for yourself, a family, or even an entire corporation. Corporate budgets can differ from personal budgets considerably, but since we are focusing on personal finance, we will ignore these for now.
Calculating your budgeting
So, what will you need to pay attention to when calculating your personal budgeting? We will shortly list the main points of consideration.
Income
First of all, how do you receive your income? Do you have a variable or fixed income? If you are working on a salary with a steady income (with the possibility of bonuses), calculating your budget should be easier. You will have a very reliable indicator of just how much spending you will be able to do, so you should be able to avoid an overall loss.
If your income is variable, however, it’s a completely different story. This could apply if you rely on hourly wages, works on contracts, or are in charge of a company. Basically, if you do not have a salary. In these cases, saving your money is far more important. While you could make unexpectedly high earnings at one time, you could equally make much lower profits at a future date. With a variable income, it is also likely that you have less stability, i.e., more chance of having no work. Therefore, when budgeting with a variable income, it is far more important to be cautious.
Your income could also be from a single or from multiple streams. If you live on only one stream of revenue, you are at greater risk of sudden losing that source of revenue. If you are living with a partner, they should always be ready to look for work in case things go belly up for you. You will, therefore, have to be more careful, it will possibly be necessary to keep an emergency fund before anything else. If you have multiple revenue streams, you can be more relaxed about your spending. You should not be too complacent, however. If the income from both sources only just covers your costs, you should always have a backup plan. Just in case one of these sources is cut off (e.g., your partner loses their job).
Spending
Secondly, how do you spend your money? What are the things to budget for? You will need to consider if there are any outstanding expenses to pay in the future. This could be taxes, insurance, mortgage, pension deposits, etc. What you will need to consider is when you make these payments, how often, and in what volume. You will have to fix your budget around and save for these sorts of events. If you generally find you are always in the negative or only just scraping buy, you may have to look at your expenses and decide what has to go. You could have large unnecessary spending habits that are dragging you down. You may also have to consider moving if your housing costs prove to be too much for you. The interest in these costs can also be an expense worth keeping track of.
Credit
Thirdly, consider whether you should be using credit. If you are using credit, make sure you reserve plenty of available funds. Going into debt with a bank can be really very bad news for you. So if you are in this scenario, it is best to use credit cards as a sort of backup. If you need sudden funds and you have no other option, credit may be the way to go.
However, overall, credit is best used responsibly. If you can afford it, you are best off using credit to collect reward points, and slowly gain credit for future endeavors. However, you should still be careful in this scenario. You can easily overspend without even noticing what you are doing, as credit cards, by definition, have no limit. This could leave you under very unfortunate circumstances if you need to. So, while you may use credit, keep a close eye on how you spend with it.
Tips and tricks
There are several quick things that you must do to streamline the process for you. First off, try to use automate all of your transactions as much as possible. If you can get payments for your bills automated to do it, as it will save up your time. Once you have free time, you will be able to more reliably focus on other parts of your budget.
Secondly, try to choose some easy to track common methods for budgeting. Whether this be something like the envelope system or the zero-based budget, it will make things easier. If you are held accountable by an easy to follow a single system, you should be able to more easily follow your progress. Once you choose a system, stick to it! A system cannot function properly if you keep changing your mind constantly. If you don’t believe a system is working, just give it some time. You will need to keep track of your budgeting, so why not write a monthly expenses spreadsheet!
Thirdly, try to prioritise. The most important expenses must come first, those which have the biggest impact on your balance. Try to find out which ones are necessary and which are superfluous, as you can make the biggest savings here. Once you have the largest expenses out of the way, you may find you do not have to make as many cuts to the smaller things, as you will have saved more cash.
Fourthly, put some money aside. We have already stated the scenarios in which saving money can be highly beneficial. This is why, if you can, you should make room for some leftover money, just in case things go wrong.
