One of the most important foundations to Financial Success is getting control over your finances to pay down debt faster, and/or accelerate your savings capacity.
The first and most vital step towards this is creating a personal budget.
A budget allows you to gain visibility with money in (income) and money out (expenses) and make conscious choices about what you do with your money to achieve outcomes that are important to you.
Making a personal budget should not be intimidating and must be kept simple. It can be a spreadsheet, where you can monitor your expected income, expenses, and target savings for a specific period (e.g. fortnightly, monthly) or online tools and apps are available that make it much easier to set up and monitor. Below are steps you can follow to create your personal or family budget.
Collect as much information as you can.
The first step in creating a budget is to gather your records (bank accounts and credit cards) and/or bills with regard to your expenses. With this information, you can determine a baseline of how much you spend.
Ideally, group your expenses to see where the bulk of your money goes. Some examples of these categories are utilities, groceries, personal, and transport.
Identify all the sources of income.
Be sure to record all the sources of income, be it from employment, or investment income. Make sure to account for tax.
Deduct your expenses from your income to determine your surplus or shortfall.
Calculate your total income and expenses, and find the difference between the two. If you have a large income surplus, then you’re on the right track. However, if you have little left or your expenses exceed your income, then the next step would be to re-evaluate your expenditure.
Adjust your expenses.
Look at the list of your expenses and identify which ones are fixed (non-discretionary) and which ones are variable (discretionary). Some examples of fixed expenses are mortgage, rent and insurance, while variable expenses can be uncapped such as entertainment. This is also a good time to decide how much you want to save and list it as a fixed expense.
Review your variable expenses and check what you can reduce or eliminate. See which items are non-essentials that you can do without and allocate the money to your savings fund.
You don’t have to be too stringent when creating a budget. You should allocate some money to spoil yourself with the things you enjoy occasionally.
Set a target and create a plan.
Once you have identified your potential savings, the next step is to create a savings plan.
For example, if you can save $200 a month, your target should be to save at least 2,400 annually. You can then either plan to keep this on a high-interest bank account or invest it.
When you have finalised your personal budget, remember that it is important to conduct reviews every month. This will help you track your progress and ensure that you are on track.
Creating a budget will not only allow for you to save some money for an awesome personal or family reward, but it can help to stop you overspending and remain realistic about your lifestyle.
Have you created a family budget before? Do you have any tips to add?