Budgeting - How To Manage Your Finances With A Spending Plan

Personal budgeting is about managing your finances through a spending plan. It is one of the effective ways of achieving your financial goals and dealing with most of your money problems. Do you sometimes wonder where your whole income has disappeared to even before mid-month? Or some days you leave for work in the morning with some cash and in the evening your wallet or purse is empty. You have no clue as to where your money has disappeared to. You just don't want to admit you squandered it. Or, someone just borrowed you for ‘not so urgent needs’ and you gave it, because for you, it is just money, and not so valuable.

Likewise, do you get frustrated by your inability to achieve your financial goals because you can't find money to get to it? No matter your good intentions to set aside some money every month towards savings, you always find yourself with nothing. Probably your expenses are higher than your income, meaning that you are living above your means, and simultaneously accumulating debt (the money has to come from somewhere to fill in the gap). You need to start using a monthly budget (spending plan) and you will be amazed on its power to help you live within your means. Likewise, you need to find ways to make more money, if what you earn is not enough to take you round the month. Note, there is no income that is so small that it cannot be budgeted for.

The main purpose of preparing a spending plan is to help you:

• Live within your income.
• Stay out or get out of debt.
• Spend your money wisely.
• Reach your set financial goals.
• Prepare for financial emergencies.
• Develop wise financial management habits.

Steps To Preparing A Personal Budget

A personal budget means matching the income one gets with the expenses, in order to reach the financial goals set in advance. Preparing a budget is not that difficult, but still it could become a hassle. Try to make it as simple and as easy as possible, and you will find the personal budget a great tool for keeping your finances under control.

Step 1: List And Total Your Monthly Net Income

Total up every net income you receive in a month. The income should include all of the resources, such as monthly salary, earnings from interest, earnings from rent, business income etc. Bonuses, gifts, or unexpected income should not be considered until the money is actually received. It's better to have money left over than be caught not being able to pay your bills because you factored in money that you weren't sure you'll receive. My wife and I personally use such out-of normal month income towards building our emergency fund.

Step 2: List And Total Your Current Monthly Personal Expenses

The expenses should include all spending - purchases, monthly bills, insurance, hospital bills, savings etc' List all your monthly expenses as they are now. Include also weekly, quarterly, semi-annually and annually expenses. Do not forget discretionary expenses such as Books, Magazines, Entertainment, Impulse purchases, Snacks, Dining, Vacation and Travel and Membership fees. You can know how much to allocate these if you track your expenses for several months, and then use the average as a guide.

Step 3: Subtract Your Current Expenses From Your Current Income

Take the total current expenses and subtract the sum from the total current net income. If, on paper, you have money left over but in reality you are living close to the edge or falling behind, then you have not accounted for everything or some of your figures are wrong. Examine your budget for inaccuracies and make corrections. Use of a budgeting software like dsbudget can help a lot. I personally prefer a software that is web-based like budgetpulse.com, so that I can upload data wherever I am (including on the go using mobile phone).

Step 4: Identify Where To Make Changes In Your Budget

Once you have an accurate idea of where all of your money is currently going it is time to make changes for the future especially if there is more going out than is coming in. Your options include increasing your income, decreasing your expenses by simplifying your life, or a combination of the two.

As you prepare and make the changes in your budget, do not forget to include money for your financial freedom account (FFA), or purse fattening account (PFA), creating an emergency fund, paying for personal loans and credit card debts, insurance premiums and retirement. After you are through matching your income and expenses, monitor your progress every month.

Our next post will look at personal balance sheeting.