Although personal budgeting is a topic that few people enjoy thinking about, it is necessary for maintaining financial stability, meeting your debt obligations and saving for future expenses such as retirement, vacations and education. Creating a personal budget can seem overwhelming if you are not accustomed to managing your income and expenses. But simple strategies can help you set a personal budget that will aid in keeping your finances in order.
Calculate Your Debt
You may be accustomed to simply making debt payments as they become due. However, you may not have taken the time to determine how much debt you carry or how much you contribute to debt repayment each month. Gather all of your most recent credit card, loan and other debt statements and enter your total balances and monthly payments into a spreadsheet. This will show you how much you need to set aside each month to fulfill your debt obligations and how much you will need to save to pay off your debts.
Categorize Other Monthly Expenses
Gather copies of your bills for expenses other than debt, such as childcare, utilities and Internet service. Print your bank statements, which will show cash withdrawals and debit card payments for non-debt expenses such as groceries, gas, restaurant meals and entertainment expenses. Use a spreadsheet to divide your non-debt payments into essential and nonessential expenses, and enter how much you spend per month on each type of expense. This can help you identify expenses that you can reduce to save for future expenses or pay down debt.
Document Your Income
If you are the sole breadwinner in your home and you work for a traditional employer, determining your income is simple. However, if you use multiple sources to contribute to your household income, document each type and amount of income in a spreadsheet and determine the total amount you have available each month. Sources can include your wages, your spouse's wages, alimony and child support payments, income from investments and non-wage income derived from business ventures. Documenting your income gives you a clear picture of what you have to work with when establishing a budget to meet expenses or achieve financial goals.
Identify Financial Goals
After you have determined how much you earn and spend each month, determine quantitative, reasonable goals for improving your finances. For example, you may decide that you want to pay off your $10,000 credit card debt in five years, save $5,000 over the course of two years for a cruise or contribute $2,000 a year to a retirement plan. In some cases, your goal might simply be to spend less than you earn so you don't have to rely on credit cards or loans to meet your monthly expenses. Determining a goal and time frame helps you understand how much you will need to save or cut from your discretionary expenses to meet the goal.
- "The Pocket Idiot's Guide to Living on a Budget, Second Edition"; Peter J. Sander, et al.; 2005