A personal budget can be a powerful financial tool that helps you get out of debt, save money for emergencies, or work in a way to afford a monthly payment for a new car. Personal budgets can be planned and managed as simply or extensively as you'd like: with plain old pen and paper, a set of envelopes and your checkbook ledger, or elaborate computer software. The power behind a personal budget is creating the plan and working within it.
A personal budget is simply a plan for spending your money. Expert financial writer and radio talk-show host Dave Ramsey explains that many people look at their income and wonder where all the money went, but by creating a budget you decide where it will go before you've even received the income. You are in full control of your finances.
By creating a personal budget and sticking to it, you can funnel money into areas that are important to you. If you want to buy a new car for example, and don't feel you can afford the monthly payment, you may be able to do so by rearranging and adjusting your current spending habits.
How to Create
Create your personal budget by looking at your past spending history. Make a list of all your bills and note down how much money you spend on non-bill items such as clothing, entertainment and gasoline. Group things together into related spending categories and add their dollar estimates to the broader group. The final amount for each group is the personal budget amount you should start with.
How to Use
As you make purchases and pay bills throughout the month, track each expenditure and match it to one of your personal budget categories. Once your spending total for a category reaches its budgeted limit, stop spending in that area until a new budget cycle starts.
A personal budget takes time to get right, particularly if you had to estimate spending areas in the beginning. Be willing to make adjustments in the first few months as you gather more concrete spending data from your tracking efforts.
- "The Total Money Makeover: A Proven Plan for Financial Fitness"; Dave Ramsey; 2007
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