Creating a personal budget is a smart way to take control of your finances without spending any money to do so. A personal budget plan is simply a plan to designate exactly how you will spend your money on each week. Setting up a budget is free, and it can help you systematically funnel extra funds into additional needs or desires you may have for your personal finances.
Review recent bills, credit card statements and checking account ledgers to determine how much money you spend on given items in a month. Knowing exactly how much money you normally spend on regular bills such as car insurance is easy because you receive a regular set bill for it. Day-to-day spending on coffee, fast food or groceries, however, isn't always readily obvious until you start totaling up individual purchases. Before you can start a workable personal budget, you must have some idea of how much money you spend regularly.
Write down your total income in one month. If you're paid weekly, multiply your weekly take home pay by four to get a monthly average. Don't forget to add other regular income sources if you have them. Note: Available credit is not a source of income, it's a source of more debt. Only include earned income and regular monetary payments as part of your income.
Write a list of each regular bill you pay monthly, and a total dollar amount for the bill. Bills such as rent or car insurance are usually static, but utilities may vary. Write down a monthly estimate for the variable bills, based on any previous bills or receipts.
Add non-bill expenses to your bill list. Anything you regularly spend money on should be added to this list, including groceries, gas or bus fare, and the occasional morning latte. List each item separately and write down an estimated dollar amount that you spend for each.
Combine related items in your expense list into broader categories. The morning latte can be combined with burger expenses under a more general "Dining Out" category for example.
Subtract the total dollar amount of your expenditures from the total dollar amount of income you bring in each month to make sure you're not spending more than you're bringing in.
Review your list of expenditures again and combine any categories and totals you may have missed previously. The remaining list of categories and amounts is the starting base for your first personal budget. Track your spending from this point on and make every effort to not spend more in any category than the total you have written down for it.
- If your expenses exceeded your income when you did the totals, start trimming a small amount of money from each category you're able to until the income and expense totals equal out. It's easier to subtract $5 from four categories than it is to subtract $20 from one, so try to spread out the reductions as much as possible.
- It can take three to four months to adjust to a new budget, so prepare to be flexible at first.
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- The Total Money Makeover: A Proven Plan for Financial Fitness; Dave Ramsey; 2007
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