This is the second and concluding part of personal budgeting. You can quickly catch up on the first article to learn why you should have a budget and how to get started. In the first article, I explained that the first step is to estimate your income. After estimating your monthly income, follow the four steps below to complete the budget.
- Consider your financial priorities and expenses
Everyone has bills to pay, such as rent, food, and electricity. However, if you don’t try to keep track of your expenses, it’s easy to spend far more than you expected on non-essentials.
According to Warren Budget, “the best protection against inflation is your own earning power”. So, I recommend you include a personal development spend in your budget.
Making a budget does not imply that you must spend all your money on necessities. The emphasis should be on appropriately spending your money for you. Think about your financial priorities and goals, as well as your happiness. When you see how much you spend on specific items, you may want to experiment with changing your spending habits to increase your savings.
- Design the budget
You can plan your future spending after you’ve considered your priorities and how they align with your spending habits.
It is prudent to pay yourself first. Savings, whether for an emergency fund, a new car, a down payment on a home, or other purposes, should be one of the first things you include in your budget. According to investing legend Warren Buffett, instead of saving what remains after spending, spend what remains after saving. Next, think about your spending habits and how they relate to your priorities. If your actual spending matches your goals, you can use your spending history as a guide for your budget.
The 50/30/20 budget principle is a popular budgeting guiding principle. The rule states that you should save 50% of your income for needs, 30% for wants, and 20% for savings. It is entirely up to you how you allocate your funds among these categories.
- Track your actual financial activities
Prepare your monthly personal financial statements. This is one of the most difficult tasks in personal finance. You can ease the process by automating payments of recurring expenses. You can have a dedicated bank account for expenses. At the end of the month, simply review the bank statement and make a summary.
- Review your budget regularly and adjust your budget as needed.
Budgets are ever-changing financial plans. They are not unyielding. After creating your budget, you should keep track of your expenses and try to stick to them. When you exceed your target performance, reward yourself for a job well done.
However, if you observe a negative variance between your budget and actual cashflow position. Investigate the variance and take corrective actions.
Interestingly, technology has eased the budgeting process. You can use budget apps provided by Microsoft excel or click this link to get a budgeting template you can customize to your needs.
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Financial Statements Analysis