Make your personal budget.

 Personal finance is basically about managing your finances to meet your financial goals. There is no financial planning without the use of a budget. Not the budget for a project, department, unit, firm or organization. I’m talking about your personal budget. Many people think budgeting is not for them, even though budgeting is a wonderful tool for managing one’s finances. The erroneous logic that stops us from keeping track of our finances is that:

• ·        We have some sort of job security (although we all agree that's a myth).
• ·        We think budgeting is complicated.
• ·        We do not want to deprive ourselves.
• ·        We may not have the discipline to adhere to one (this is actually a struggle).

 I know personal budgeting carries a negative connotation amongst some of us, but it is actually a great way to avoid running out of money due to excesses.

A personal budget is a financial plan that allocates available or expected resources (income) towards expenses, savings and debt repayment. Past spending and personal debt are usually considered when creating a personal budget. Preparation of a personal budget should a cover a period of time as can be managed, it can be a month, a quarter, biennial or annual. This tool is not only for those who need to monitor their cash flow from month to month because money is tight. Almost everyone, even those with large pay checks and plenty of money in the bank can benefit from budgeting. Budgeting allows you to create a spending plan for your money and ensure that you will always have enough money for the things you need and the things that are important to you.

STEPS TO CREATING A PERSONAL BUDGET.

The key to making a budget is to keep it as simple as possible. The more complicated it seems, the less likely you are to stick to it. Keeping it simple means identifying where income and expenditure is present or dominant in the common household.  Here are simple steps to making a personal budget:

1.    Gather every source document you may need: Source documents include financial statements like bank or investment account statements, recent utility bills, and any information regarding a source of income or expense. This is because while making your budget you need to create a monthly average, so the more information you can dig up, the more realistic your budget can be.

2.    Record all your sources of income: Using information from your source documents, record all your sources of income. If you are self – employed, be sure to record all regular or irregular sources of income. If your income is in the form of a regular pay check where taxes are automatically deducted, then using the net income (or take home pay) is fine. Record this total income as a monthly amount.

3.    Create your monthly expenses list and categorize: Write down a list of all the expected expenses you may incur over the course of a month. For example: Rent, payment for car services, auto insurance, groceries, utilities, entertainment, dry cleaning, student loans, savings etc.

Monthly expenses can be broken down into these three (3) categories:

Fixed Expenses – Those expenses that are essential and stay the same from month to month, e.g. rent, phone bill, trash pickup etc.

Variable Expense – Those expenses which are also essential but may vary from month to month, e.g. food, fuel/gas etc.

Wants – Nonessential expenses e.g. Eating out, Electronics, Movies etc.

4.    Deduct your monthly expenses from monthly income: If your end result is positive, that’s wonderful. This means you have a surplus and can invest your money or eliminate that debt faster. However, if your result is negative, it means some changes or adjustments will have to be made.

5.    Make adjustments to expenses i.e. downsize and substitute: If you have accurately identified & listed all of your expenses, the ultimate goal of your budget, would be to ensure that all of your income is accounted for and budgeted for a specific expense or towards a savings goal. If you are in a situation where expenses are higher than income, you should look at your variable expenses to find areas to downsize and substitute. This is to ensure that you have a balanced budget, in which savings and investments are provisioned or in order to avoid debts and bankruptcy.

Substitution keeps the basics while cutting down the costs. For example, if you have a per month gym membership, cancel it. Use a half of the money you save begin building a home gym. Instead of buying coffee or smoothies from a fancy shop, make yours from home. This has a lasting effect, because it saves money in the long term while maintaining status quo. Since some of your wants may not really be essential, it should be easy to shave off some money in a few areas to bring you closer to your income.

6.    Review your budget from time to time: Part of the process of budgeting also include reviewing your budget on a regular basis to make sure you are staying on track. After the first week or month, take time to sit down and compare the actual expenses versus what you had created in the budget. This will show you where you did well and where you may need to improve.