Do you have a personal budget?
Budgeting or financial planning is a must-do to keep track of your assets and finances. Budgeting helps in the effective management of finance. As Benjamin Franklin said, “If you fail to plan, you plan to fail”.
Setting up a personal budget is one way to safeguard yourself during a recession and in the boom. Although many people love spending and saving, just a few realize its benefits.
Preparing a personal budget or tracking daily expenses can be challenging for most people. But the benefits are limitless, once adopted.
Many people think budgeting can only be done on a laptop or computer. With a notebook, you can set up a budget.
What Is the 50, 30, 20 Budget Rules?
The 50/20/30 budget rules fundamentally operate on the idea of splitting up income and share it into certain categories. In that 50% on needs, 30% on wants, and socking away 20% to savings.
Senator Elizabeth Warren pitched the idea in her book, All Your Worth: The Ultimate Lifetime Money. So in this article, we like to write briefly about this easy-to-follow rule.
Note: The 50 30 20 budget is sometimes tagged “50-30-20”
Needs are those inevitable bills that you must pay and as such are essential for your survival. These include payments such as car payments, health care, rent or mortgage payments, insurance, utilities, and groceries.
All these payments above are inevitable for your survival and so must be paid for. However, things like HBO, Netflix, Starbucks, or simply put all those extras don’t qualify as your needs.
So the idea of “50% Needs” means only 50% of your net income should be spent on your needs. And, if your spending on needs is already above this boundary, then you need to cut it down.
How you do this is by reviewing your lifestyle and see where you can downsize. For example, you may want to consider moving into a cheaper and smaller home. Or buy a modest car rather than a flashy and expensive one. Overall, you have got to look deeply into your lifestyle and adjust your spending on wants, where necessary.
Wants, on the other hand, are payments you make on things that are only necessary but not absolutely essential. Good examples of these types of spending are big house, fashionable clothes, dinner and movies out, latest car, etc.
Anything you desire that if you don’t acquire it wouldn’t affect your survival should go to the “wants” bucket. You can eat at home instead of dining out, you can watch a movie at home instead of paying a fee to watch a movie in a cinema, and you can work out at home instead of going to the gym.
All in all, any money you spend on something that’s meant to give you more enjoyment rather than survival is wants.
As you’re paying your bills, you shouldn’t forget to plan for savings and investments. So using this 50 30 20 as a guide, you need to earmark 20% of your net income to savings and investments.
You should consider options like putting aside money for an emergency fund in a savings account. This could also include investing in the stock market, and more.
Saving for an emergency fund is especially necessary in case something bad happens. Think about the sudden loss of a job or an unanticipated event. So save for these kinds of events. After all these, then come to your retirement and other financial goals follow.
If the emergency account gets exhausted, the first allocation of additional income should go to the emergency fund account. There is also one thing you need to understand about a loan or debt repayment. Debt repayment can also be classified under savings because any extra payments made reduce the principal and interest owed.
Considering all the points above, it’ll be very important for us to talk briefly about the importance of savings.
Also Related: How to get out of Debt and Save Money Quickly.
Why Savings Is Important
To start with, let’s look at what the statistics are like about savings in America. Here is what American savings statistics look like according to this report:
- Americans have more than $3.9 trillion in personal savings
- 69% of adult Americans have less than $1,000 in a savings account
- The average household savings in America are at $17,135
- 73% of millennials are saving money
- The median balance of retirement accounts is $65,000
- The US has a retirement savings deficit of $4.3 trillion
- Black households have $29,200 saved up for retirement
Going by the facts above, we can understand why savings should be taken seriously. As put by Milan Urosevic of SPENDMENOT, it should be seen as the difference between life and death.
One of the importance of savings is to help individuals manage their net income. And to ensure that individuals have more funds on hand for emergencies and retirement.
Having an emergency fund helps during unexpected medical expenses, job loss, and other unanticipated financial needs. So the principle is once an emergency fund is nearing exhaustion, you should try and replenish it.
Also, savings are important when planning for your retirement in that you’re able to calculate how much you’ll need and how to meet the goal.
How Do You Create a Personal Budget?
In this section, we’re going to discuss how to create a personal budget that works for you. So sit tight and read through as we discuss.
How to Create a Monthly Budget in six simple steps?
The first thing you ever need to get started with creating a budget is getting a template to use. This is where you’ll fill in all the figures for your expenses and income.
Another is whether you should use old-fashioned pen and paper for doing the budgeting. Well, it doesn’t really matter but it’ll be more efficient to use a budgeting app or monthly budget spreadsheet. The good thing about this is that they already contain designated fields for thing like:
- Expenses in different categories, and
- Built-in formulas
We assume you’re done with the things above, so let’s move on to the 6 steps to create your personal budget.
Get All Your Financial Paperwork
Gathering your financial paperwork entails gathering all your financial statements. And this includes things like bank statements, investment accounts, credit card bills, and mortgage or auto loan statements. You’ll also need your recent utility bills, receipts from the last three months, 1099s, and W-2s, and paystubs.
Why all these are important is because they provide you with information relating to your income and expenses.
Calculate Your Income
Now you have got access to all the information above, you need to determine your income. Calculating your income can take two ways: one, using your net income, for people with a regular paycheck.
Two, you can calculate your income as self-employed, or for people with other sources of income. Examples of outside sources of income include child support worker income or Social Security, etc.
So you know where you belong and so should calculate your income based on what applies to you. Record whatever you get from these sources as your monthly income.
Another thing is how do you calculate your income if you’re having a variable income. That is if you’re a freelancer or seasonal worker. In that case, you should use your lowest-earning month in the previous year as your baseline income.
Calculate Your Monthly Expenses
The next step is to create a list of your monthly expenses. You can get the number from your bank statements, receipts, and credit card statements from the last three months. This will give you an idea of what your spending used to be.
Some examples of expenses include things such as:
- Mortgage payments or rent
- Car payments
- Personal care
- Eating out
- Transportation costs
- Student loans
Determine Your Regular and Irregular Expenses
Other things to consider in your expenses are those regular and irregular expenses. These are otherwise known as fixed and variable expenses.
Regular or fixed expenses are those financial obligations you pay for regularly whose amounts are fixed. Examples of such expenses include items like car payments, mortgage or rent payments, trash pickup, set-fee internet service, and regular childcare.
Another item that should also be included under this category is credit card payment. You should include credit card payment only if you pay a standard credit card payment.
As for variable or irregular expenses, these are expenses that don’t have a fixed amount each time you pay them. They tend to vary from month to month. Examples include groceries, Gasoline, entertainment, gifts, and dining out.
As you’re about gathering your fixed and variable expenses, start by assigning monetary value to your fixed expenses. And, after that, try and estimate how much you’ll spend on a monthly basis on your variable expenses.
In any case, where you can’t ascertain how much you spend in any category, use your credit or bank transactions as a baseline.
Add Up Your Monthly Income and Expenses
Now, you need to get the total value for your monthly income and expenses so you see what each looks like. Where your income is higher than your expenses, it means you’re on a good start. You can put those excesses into other areas of your budget. You can put the excess fund in areas like debt repayment or retirement savings.
More so, where your income is higher than your expenses, you should consider adopting the “50-30-20” budgeting philosophy. And by this, it means half of your budget should go to “needs expenses”. While 30% should represent wants, savings and debt repayment should make up the remaining 20% of your budget.
Adjust Your Expenses
So you have come to the end of the steps to creating your personal budget. You have estimated your income and expenses and you can now say which one is higher. If your income is more than your expenses, it means a good thing for you – you’re under-spending. But if the reverse is the case, you need to make an adjustment to your expenses.
To do this, you can only adjust your variable expenses. In that, you need to look at your variable expenses for an expense you can reduce in your spending. Look for those non-essential expenses that you think you are spending much on. And reduce them.
If after reducing your variable expenses, your expenses are still higher than your income, consider reducing your fixed expenses. Often time, what causes your expenses to be higher than your income is debt repayment, where the debt is significant.
In such cases, reducing only your variable expenses wouldn’t suffice, you’ll need to also reduce your fixed expenses. And then increase your income to balance your budget.
The bottom line is to ensure your income and expenses balance up. This equality of balance means your income is accounted for and budgeted towards a given goal – expenses or savings goal.
How Do You Create a Personal Budget Spreadsheet?
Have you ever wondered what a personal budget spreadsheet is?
A personal budget spreadsheet helps you determine your financial status and plan your spending for a given period. A budget spreadsheet usually covers a month or year. It’s very important to have a budget spreadsheet as it helps you organize your spending and avoid debt.
Today, most people fall into a debt default because they fail to maintain a personal budget spreadsheet. A debt default is when a debtor fails to meet his financial obligation as when due.
In a simple word, it means the debtor fails to pay his/her loan at the agreed time. To determine the time of default depends on the time agreed on by the creditor and the debtor. With a budget spreadsheet, the fund is managed and expense is allocated sufficient amount without going broke.
Now that you understand the importance of a budget spreadsheet, how do you create a budget spreadsheet?
To create a budget spreadsheet, you need the following thing;
- Time. Just a little time, I mean.
- You need to know how to typing, and
- Easy-to-use browser-based Excel online software.
To get the browser-based Excel Online with in-built preformatted budget templates is easy and free. You can get the browser-based Excel online with a Microsoft account.
Using spreadsheet software isn’t as difficult as you think. But if you’ve never used it before and don’t have the clue as to how it works, don’t panic! In this guide, you’ll learn how to use a spreadsheet to create your budget in a second.
Ready to go?
Here’s how to get started with using a spreadsheet.
Step 1: Select an App to Use
As you’re ready to create your personal budget spreadsheet, you need to pick a program to use. Fortunately, this need not be time-consuming as Microsoft Excel already offers that feature. You have two options to go about this if you choose MS Excel. Either pick paid version or the free version. You can find the free edition for iOS and Android.
There is also the free basic version that you can run in a web browser. Most times, you possibly already have the pre-installed or free spreadsheets programs on your device. You may need to check this to be sure you have one on your device.
Some examples of Spreadsheet app you can use include
- Google Sheets. This available on Android, iOS, and web
- Apple’s Numbers software for iOS, macOS, and web.
- ImageGoogle Sheets. These include ready-made budget worksheets with instructions for how to use them.
- Apache OpenOffice offers a Calc spreadsheet program for creating a budget spreadsheet
- LibreOffice. This is a free open-source suite that can be run on Windows, Mac, and Linux systems.
You may also want to shop around the app stores for plenty of other options.
Step 2: Select a Template
Here you’ll need to select a template to use for your spreadsheet budget. Fortunately, there is an option you can use which is the spreadsheet programs for home computers.
This is a popular program that has been around for some time now. The good thing about this program is that most of them already contain a “personal budget” template. And in the template, you have things like spending categories, design, and formulas already formatted.
This makes them ready for use for you and you only need to start inputting information. And interestingly enough, the software will do the rest of the job for you.
Credit…The New York Times
So to create your spreadsheet in practice, follow these steps:
- After you pick a spreadsheet program, select from the template library your preferred type of starter document to use.
- Once you opened the program, select the template of your choice from the “Template” or “Project” gallery. In selecting this template, consider what best suits your needs. And then start to create your spreadsheet.
Step 3: Fill in Your Numbers
After you open a template, you’ll see cells in the spreadsheet for you to enter your own numbers. You’ll get information to enter into the cells from number 1 of 6 steps to create a budget above. So start to click into the cells, delete the sample numbers, and type in your own numbers.
Enter your monthly incomes in the designated place and then add in your monthly expenses.
Step 4: Check What You Have Got
Next is to check your results. Two things may come up in the results. First, you’ll see a line showing your current state of finance for the month. And second, you’ll see added totals in the columns for income and expenses. A statement showing the movement of cash in and out like this is known in accounting as cash flow.
Step 5: What Next?
That is all there is to know about creating a personal budget spreadsheet. So you already know how a spreadsheet works and how to use it but what next?
You can choose to keep going with your current software or move up to a dedicated App. Some of the advanced features you can get with a specialized app include sending trends and coaching.
So they really worth it but you’ll do fine using your current app. But it all your choice to make.
What Does a Personal Budget Include?
There is no general rule for what you should include in your personal budget. Because what applies to one person might not apply to another.
It all depends on individual lifestyle and spending habits. But to give you an idea of what you shouldn’t overlook when budgeting, we have compiled this list. Here are common things to include in a budget with their examples:
- Rent. Examples include water, electricity, and heating or air conditioning.
- Foods and groceries: These include all consumer goods.
- Daily Incidentals
- Irregular Expenses and Emergency Fund
- Household Maintenance. Examples are cleaners, repairs or replacement for damaged appliances, and furniture cleaning
- Work Wardrobe and Upkeep
- Subscriptions. Items such as subscriptions to music services, streaming services, and online publications.
- Guests. These include spending money on groceries, laundry, and transportation when they visit you.
- Travel Expenses. Examples are gasoline, train, flight, etc
- Memberships. Expenses like gym membership or Yoga studio membership fee.
- Prescriptions: These include medicinal items such as Tylenol, Advil, Tums, and Claritin.
- Pet Care. Examples include veterinary costs like vaccinations and checkups, grooming, and pet food.
- Bank Account Fees. Bank fees include charges for low balances, transfers, account maintenance, and overdrafts.
- Parking. Examples include parking when you visit an amusement park or when you’re traveling.
- Car Registration
- Entertainment. These include going to the movies, or attending concerts.
- Birthdays. These include buying cake, wine, etc.
- Holiday Gifts
- Charitable. Examples are fundraisers for injury-stricken people.
What Is a Sample Budget?
A sample budget is a budget created by one person and used by another as a guide to creating his/her own budget.
Although the sample budget is hard to see, we have created this sample for use only as a guide.
Note that the figures used here are not general and so you should use your own figure instead.
For the purpose of illustration, we’re using a two-income family namely, Bill and Rebecca. Bill works for an engineering company and earns $2500 a month, net income.
Rebecca works part-time as a clerical officer and brings home $350 every two weeks, net income. They have two adopted daughters; the first one is in school and the second in daycare. There is one car at their disposal, which Bill drives to work. Rebecca commutes back and forth to work on public transit. They have a rent payment of $600 a month and have a loan of $3250.
In spite of their different pay time interval, they decide to adopt a monthly budget interval. To do this, they need to calculate their combined income for the month and when they’ll receive it. For Rebecca, she will get three paychecks in one month, on the 1st, 15th, and 29th.
Bill and Rebecca’s income is calculated as follows:
|Income for Tim and Sally (Monthly)|
|Sally — 8th of the month||$300.00|
|Sally — 22nd of the month||$300.00|
Their expenses are as follows:
|Expenses for Tim and Sally (Monthly)|
Fixed time payments
|Children’s music classes||$70.00|
|Total Planned Expenses:||$2200.00|
Gong by the numbers above, you can see that their combined income is higher than their planned budgeted expenses.
However, it’s advisable to put this extra money in an emergency fund account for unexpected or unforeseen expenses. For example, in any given month, Bill’s car may break down and need some repairs. Bill may dine out someday.
The following table shows a typical example of unexpected expenses that can occur in a month:
|Total Unanticipated Expenses:||$150.00|
As you can see, the above gave us a vivid insight into Bill and Rebecca’s state of finance. Their total monthly income is $3100 and their monthly expenses come to $2350 (adding both planned and unanticipated expenses).
By looking at the above totals we get a clear picture of Tim and Sally’s financial situation. Their total monthly income is $4800 dollars and their total monthly expenses (for this month) work out to $4630 (found by adding their planned and unplanned expenses).
After all, expenses are paid, they have an extra sum of $750, which they can spend as they please. But they can also save it for when they may have higher expenses. Above all, they have covered all their expenses, they’re saving for retirement, and they are paying their debt.
How Do You Prepare a Budget Report?
A budget report is a report that shows your state of finances. A budget report is prepared to allow you to keep a tab on your spending. It’s prepared to ensure you’re on track to achieving your goals.
A budget report should comprise all the documents and presentations you need to answer questions pertaining to your budget.
The steps to preparing a budget report are basically the same as the ones to create a personal budget explained above. However, here are the steps to follow when creating a budget report.
- Prepare a report summarizing your spending for the last month or quarter
- Build a spending forecast for the next month
- Focus mostly on the areas where you under-spending or overspending
- Address areas that need cutting your spending or increasing your earning to stay on budget
- Create a chart to include a keynote presentation
- Review your materials before presenting your report
- Review and practice giving the presentation of the report
How to Make a Budget in Excel
Need to make your budget in an Excel spreadsheet but don’t know how? If you’re looking for ways to customize your budget even more in a spreadsheet, we have got your back. Since this is a whole topic on its own, we have found a comprehensive guide for you.
Here’s how to make a budget in Excel from scratch, a comprehensive guide for you. Go ahead and have a good read.
Creating a personal budget isn’t enough if you don’t have hacks for sticking to your budget. If there’s any question we get asked often it’s about tips to living within your means and keeping to your budget.
Here are our best tips and tricks for budgeting:
- Cut your coat according to your cloth. In other words, let your expenses be determined by your resources.
- Don’t go grocery shopping hungry
- Keep a tab on your expenses. At the end of the month, this will help you know where you’re overspending or under-spending.
- Reduce your dining out or overspending on non-essentials.
- Talk yourself out before making a purchase.
- Instead of buying from the pricey store, opt for a thrift store where you can same item for a cheaper price.
- Keep reminding yourself of your financial goals especially when at the mall.
- Use cash instead of your bank app. This means when you run out of bills, you run out of money to spend. This way, you can avoid overspending.
- Avoid watching commercials. Get a PVR.
- Always rationalize before buying a non-essential item e.g. Toy.
- Make it a habit to always review your budget and spreadsheets regularly.
- Use free or cheap spreadsheets instead of expensive apps like Quicken.
- Think about money philosophically. Let your spending reflect who you really are. If you wouldn’t want to be called a spendthrift, reconsider. And make better purchases that reflect the good personality you’d like to have.
- Exercise at home instead of going to the gym.
- Always make an informed buying decision. Do extensive research about the price and quality of an item before buying it.
There you have it: Create a Personal Budget? A Step by Step Comprehensive Guide. This is the only guide you need to get started. From why savings is important and how to create a personal budget spreadsheet, this guide has covered a lot. All you need is to bookmark this page so you can keep coming back to it.
So what are you waiting for? Go ahead and start creating your personal budget to shine.