As financial educators, one of the biggest recommendations we make is for people to design their own personal budgets. Personal budgets are one of the most effective ways to achieve financial goals, and to ensure that any spending does not get out of control. In our experience, once people can clearly see exactly how much money is being spent and on what, they can learn to better control their money, and to reduce any unnecessary spending.
Many people have no issue with designing plans for other aspects of life – career and professional goals, romantic goals, physical or mental health goals, yet many people neglect budgeting for financial goals because they are seen as additional work, much like mowing the lawn or fixing the roof. But designing a personal budget is one of the most important plans we can make – budgeting allows you to create a spending plan for your money, it ensures that you will always have enough money for the things you need. Following a budget can also save the stress of overspending and falling into debt. In this case it’s always good to have a plan – if you don’t have enough money to do everything you would like to do, then you can use the budgeting process to prioritize your spending and focus your money on the things that are most important to you.
Once you create your first budget and begin to use it, you get an instinctive feel for how it can keep your finances on track. You may want to map out your budget for 6 months to a year down the road. By doing this you can forecast in which months your finances may be tight and in which ones you’ll have extra money. You can then look for ways to even out the highs and lows in your finances so that things can be more manageable.
Extending your budget out into the future also allows you to forecast how much money you will be able to save for things like holidays, a new vehicle, your first home or home renovations, an emergency savings account or your retirement. Using a realistic budget to forecast your spending for the year helps with long-term financial planning. Realistic assumptions can then be made about your income and expenses, and you can plan ahead to aim for long term financial goals.
Use these simple steps to design your Personal Budget:
- Work out your ‘net income’ – your total income once all the deductions have been made
- Write down all your bills and expenses
- Check if the expenses are essential or non-essential
- Compare the total expenses (your outgoings) to your wages (your income)
- If the outgoings are more than your wages, then changes need to be made
- Prioritise the expenses that are essential and reduce your nonessential spending
Designing a Personal Budget is one of the most important and effective ways of controlling our finances. It’s simple, quick and easy to do and once you have done it your financial challenges will become clearer and easier to overcome, while developing a healthy habit of tracking your financial transactions. For a simple method of designing your own budget, try our new Budget Calculator: