If you don’t understand how to go about setting your personal budget, then you are at risk for getting into debt problems. You really need to understand how to create a budget, what it means, and how to manage it properly.
Creating a budget for your personal finance is a way of creating consistency and stability in your day-to-day life. It helps ensure you keep within the limits of your spending and can meet your financial goals and aspirations.
It can be a big change from old habits where your spending may have been out of control or irresponsible. These habits are how many people end up in debt they can’t manage.
The first step in creating a budget is knowing how much you spend in an average month for all your bills and necessities. Because of this, it is usually worth tracking and monitoring your finances for a few months before you calculate your budget.
The more months you have to analyze your spending, the more accurate your monthly averages will be.
Ok, so you’ve tracked all your transactions, and you’ve created some monthly spending averages. If you are similar to a lot of people, Your monthly cash flow is close to zero.
This scenario is remarkably common even without monitoring, people tend to have a feeling for what a normal level of spending is in a month and stick to it. In many cases, people spend just a little bit too much which over time which leads to credit card abuse and increasing interest charges.
Let’s get out of this horrible cycle right now! The first thing you need to do is reduce your spending. In most cases, you can make a modest impact here quite quickly. Some strategies to employ include:
- Switching your utilities (cheaper cable etc.).
- Canceling un-needed subscriptions, memberships, etc.
- Re-financing mortgages, credit cards balances, etc.
Now let’s say we’ve managed to reduce our outgoing spending by $200 a month. Without creating a budget, it’s so easy for this money to disappear on luxuries, so it’s important to be disciplined.
Now we know roughly what our bills are going to be in an average month so we can enter this in the budget first.
Next, you also want to set aside a little each month for miscellaneous spending such as groceries, charity donations, etc.
Next look at your savings. Say you want to buy a bigger place in the near future. If you set $150 aside each month into savings, I will have a nice down payment within a few years.
That may seem like a long time, but you have to start somewhere, and you’d be surprised how quickly you can add up the saving when you give it some real effort
Ok, so next in the budget is luxuries. This covers all your spending on lifestyle and treats such as going out to dinner or the movies. If you’re honest, you could probably cut back a bit of this stuff if needed.
An average spend may be $200 to $300 per month. So you are going to set the budget at $400 which gives you a bit of leeway. So now your financial goal each month is to spend no more than $400 on luxury items.
If you find it very trying to stick to your target, there are a few tricks you can use. For example, withdrawing $400 in cash at the start of the month and not spending it. Or not using your credit cards at all (lock them away or give it to someone you trust).
Also, before you buy something, wait 24 hours. Often, after a period of reflection, you find you can probably live without it anyway.
If you can stick to your budget, then there will extra going into your savings each month and not coming out! This will help you keep out of debt! So, once your budget is set, you just have to be disciplined and stick to it. It really is that simple.