Personal budget management in 8 steps

Personal budget management in 8 steps

Personal or family budget is a summary of the planned and actual income and expenses for a certain period of time, most often, for 1 month.

For many people, personal budget are associated with tightening their belts, scrupulous consideration of every penny, etc. Managing your personal budget may seem boring, but it is vital to manage your personal budget if you want to take control of your personal finances and not be in poverty. Consider your personal budget as a tool for achieving your financial goals.

The essence and structure of the personal budget

Personal budget allows you to record the planned and actual income and expenses for each item for a certain period, analyzing and comparing them. Your personal budget will show what items you earn and spend money on, if you are able to follow your plans and whether the actual amount of income exceeds expenses.

If you spend a lot of money on some items, you can redirect these expenses to other, more important items. Alternatively, just find out which high-cost items are of little importance to you and reduce expenses on them to a minimum, or stop spending money on them altogether. Saved money is earned money that you can invest in stocks and other financial instruments.

The structure of a personal budget usually looks like this:

  • Separate lists of permanent and non-permanent planned income;
  • Separate lists of permanent and non-permanent planned expenses;
  • Separate lists of permanent and non-permanent actual incomes;
  • Separate lists of permanent and non-permanent actual expenses;
  • Result page of aggregate statistics and results.

Lists and results are compiled for a certain period, for example, for 1 month.

How to create and manage a personal budget

Below, I present a guide to creating and managing a personal budget, consisting of 8 steps:

Step 1: Collect all financial documents

Collect and save checks, utility bills, bank statements, brokerage accounts, and any other documents about cash inflows and outflows. The combination of these documents shows the overall picture of the movement of personal finances, helping in the management of personal budget.

Step 2: Record all sources of income

Employment, part-time work, bank deposits and investments – all this should be fixed and recorded. For each item, specify the total monthly income. If there are tax deductions, record them too.

Step 3: Record all expenses

Record all expenses for which you plan to spend money during the month. This includes utilities, car costs, insurance, mortgages, entertainment, food, etc.

Step 4: Divide the income into 2 types: permanent and variable

Permanent sources of income bring money every month. For example, employment, business, etc.

Variable incomes bring money periodically. For example, one-time side jobs, dividends, etc.

Step 5: Separate costs into 2 types: permanent and variable

Permanent costs require constant monthly payment. For example, mortgage loans, utility payments, rent, Internet charges, heating payments, etc.

Variable costs vary from month to month and can be one-time. For example, the cost of entertainment, gifts, travel, celebrations, fuel, etc.

Step 6: Add up your monthly income and expenses

Calculate the total amount of monthly income and separately – expenses. If the results show excess income over costs, then congratulations. You have the ability to save money.

If costs exceed income, then you should cut costs, making changes to your personal budget and strictly follow them.

Step 7: Cut costs and increase income

If costs is higher than your income, then think about how to cut it. Some costly items such as entertainment and travel can be discarded. Other costly items can be minimized. For example, ask for a discount, look for cheaper service providers, etc.

Synergy gives the best results. Therefore, also try to increase the amount of income. Look for additional sources of income, take a side job, demand an increase in wages, or change jobs to a higher paying one.

Step 8: Analyze your personal budget

Monthly conduct an audit and analysis of personal budget. Compare your actual income and expenses with those in the budget. Try to follow the budget plan. If necessary, reduce costs in those items that do not affect the quality of life.

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