Make a Personal Budget

Personal Finances

What is the purpose of a personal budget in the United States?

Money is a scarce resource for the vast majority of us. Every one of us must decide how to spend our money properly. Making sound financial decisions is difficult. What is prudent for one family may be disastrous for another. On a daily basis, we spend money on both essential requirements and nonnecessities that are sometimes luxuries.
Some expenses blur the distinctions. For example, we all need to eat, but do we have to eat lunch out every day? Aside from spending money, it is up to each of us to construct a secure financial future by putting some of our money into savings, investments, and asset creation. A good gameplan is the best method to develop a solid financial future and actual wealth. You can’t have a viable gameplan for money management unless you have a personal budget. has prepared this free budget guide to assist you in developing your own plan.

The average American is spending more and saving less than ever before, thanks to a spike in credit card usage and record debt levels. We may all buy things using credit cards and lender loans that go beyond what we have in the bank or what we can simply pay off. This provides us with ease and the ability to purchase larger ticket products that we all require to live, such as automobiles and homes, but it also means that if you are not careful, you may easily build enormous debt. According to the Federal Reserve, the ratio of consumer debt to income reached an all-time high in 2007 as a result of increasing expenditure.
More American families are facing financial difficulties, some of which are severe enough to force them into bankruptcy. Despite the fact that the average consumer debt has lately fallen, many Americans are still struggling financially and looking for a way out of debt.

The Value of a Personal Budget

Create your own personal budget as a first step toward better financial wellness. Your budget will assist you in determining what you can afford, where your money is going, setting suitable spending targets, and truly planning for a secure financial future. A well-managed budget can also assist you in reducing your debt and avoiding further financial difficulties. Many people who do not have a budget are unaware of how quickly and readily they squander their money. A latte may only be $3.00, but

Buying one every day costs more than $1,000 each year. If your salary level allows you to cover your bills, then drink all the lattes you want, but if you are in debt and don’t know where your money goes every month… now is the time to get into financial shape!
Making and sticking to a budget allows you to better understand how you spend your money. It forces you to categorise your spending (e.g., housing, transportation, food and clothing, entertainment, etc.) and can assist you in setting appropriate cash flow targets. A budget also assists you in identifying areas where you can cut spending in order to minimise your debt and use your money more effectively.

Your budget is your financial plan; you establish spending limitations for each area of costs in a given month. Setting boundaries holds you accountable for how much you can spend in each category and can prevents you from overspending. Once you’ve created a budget, you must keep it up to date on a regular basis. It is not sufficient to go to the gym once and expect to be fit. It’s also similar to a diet. You don’t just make the decision to lose weight. You devise a strategy and then stick to it!

Make use of your budget to plan for the future. When utilised correctly, a budget can help you spend sensibly and achieve financial goals such as debt reduction, saving for large purchases, paying for higher education, starting a business, or building a retirement fund. A solid budget can also bring peace of mind since it allows you to feel in control of your financial fate, which is a really liberating sensation.
We’ve created our free personal budget guide at to assist you in taking the first step toward improved money management – and, as with any great journey, the first step is the most crucial – but you must make the commitment to take that step and allow us point you in the correct direction. The purpose of this budget guide is to assist you in:

– Make a personal budget and track your real spending.
– Pay off “unhealthy” debts – Establish long-term financial goals – Achieve your long-term financial goals and feel in charge of your financial destiny

Developing a Personal Budget
Looking in the money mirror to understand your financial status
Understanding how much money comes in and goes out of your household each month is one of the first steps toward financial freedom. This is referred to as “cash flow,” and it refers to how much money comes in as revenue and how much money goes out as spending. If you don’t have much more coming in than going out, you may need to make some immediate changes. Begin by filling out the Personal Monthly Budget Worksheet, which is available on the following page. Your spreadsheet categorises your revenue and expenses, presenting you with a view of your overall cash flow picture.

Making a budget projection

Examine the budget spreadsheet and familiarise yourself with the categories listed. You will notice a succession of primary categories, followed by specific expenses stated within the categories. There are various categories for gross income and income taxes. Some of your spending will be consistent month after month, while others will change. This is one of the reasons why developing and adhering to a budget is a continuous process.
Your predicted budget outlines how you want to spend your money each month. Keep track of how much money you spend in each category.

At the conclusion of the month, your estimated budget should not be in the red, or negative. You should also make provisions for emergencies and savings, as well as account for any bills that are paid annually rather than regularly (e.g. insurance and property tax). If you are unsure, create a preliminary shortterm budget for three months. After analysing your results, you can move on to creating a yearly budget.
While having complete records to review is preferable, do not be discouraged if you have incomplete records. You can begin keeping detailed records as soon as today. Keeping track of your costs is not always easy, but it is a necessary step. It can be depressing to even look at your invoices if you are having financial issues, but you must face this challenge. Things will not improve until you take the necessary efforts to improve them.

Determine Your Actual Bills

One method for examining your bills is to divide them into set monthly spending and variable expenses. Rent or mortgage, health insurance, a car payment, and some utilities are examples of fixed expenses. Typically, the costs for these expenses do not vary considerably from month to month. If at all possible, budget enough of your income to pay off these purchases each month.

You are in serious financial difficulties if you are unable to cover your basic, set expenses. If you’re using credit cards to meet your fixed bills, you should look into debt relief options including credit counselling and debt settlement. Some fixed expenses, such as Cable TV, are unnecessary and may need to be eliminated in order to right the financial ship.
Second, figure out what your variable expenses are. These expenses vary month to month. Food, clothing, gasoline, and entertainment prices are examples of variable expenses. In contrast to fixed costs, variable costs are simpler to reduce, allowing you to boost your cash flow. While certain fixed costs, such as your rent/mortgage or car payment, can be decreased, it will necessitate a significant shift. You may live in a less expensive house, replace your automobile with a less expensive one, or even do without a car.
Reducing variable expenses, on the other hand, involves more discipline and incremental modifications that rarely result in drastic lifestyle changes.

Begin by determining the proper monthly budget for each category. When determining your budget for each area, examine if the item is a luxury or a need. Really think about whether you need it or not. Water is necessary, but is it necessary to spend money on bottled water? Even if you consider something to be a must, check around for the greatest price. Every dime you save counts. Some short recommendations include shopping around and comparing prices, not going grocery shopping while you are hungry (you will want to put everything in your cart), and using third parties.

Use third-party websites to compare and save money on things like cell phones, cable, and insurance. If you have a mortgage, see if you can refinance to a cheaper interest rate, and always compare the lifetime true cost of a loan, which includes any points or fees.

Next, prioritise your necessities from most critical to least important. Spend your money on the things you need the most and that are most essential to you first. Set a budget for your luxury things for the time being.

After allocating your income to all necessary expenses, decide how much you want to put each month into a savings fund for future use and wealth creation. To increase your net worth, it is advised that you save at least 10% of your income. You should also seek to save for rainy days. Money in your rainyday fund can be used for any unexpected emergency circumstance, such as an accident or unforeseen medical bills, or for an annual bill that you did not plan for in your budget spreadsheet. Finally, set aside any residual funds for luxury items such as a gym subscription, entertainment, dining out, and so on.

Keep in mind while you create your budget that it is a tool for you to construct a good financial strategy and positive cash flow.

Spend Your Money Wisely

Here is a rough guideline on how your household expenses should be broken down to assist you select how to distribute your income. The graph below depicts percentages for the five primary categories: home, transportation, debt, other, and savings. Multiply each expense percentage by your net income to get the recommended spending amount in dollars.

If you spend more money in one category, look through your costs in that department and see if you can cut back. You won’t be able to easily cut all of your spending. In general, you should start by looking for ways to cut expenditure on non-essential things. Whether you are significantly out of line in a large category, such as “Home” or “Transportation,” you may want to do a gut check and even consult with a financial mentor or advisor to determine if downsizing, moving, or purchasing a less expensive automobile are viable options.

Filling Out Your Personal Budget Worksheet

1. Fill in the following fields on the spreadsheet for estimated expenses:
Don’t be concerned about complete precision. The goal of filling out the expected numbers is to later compare them to your actual spending. Your projected numbers will serve as a foundation for you to assess your understanding of your own cash flow. The further you go from your projections, the more vital it is for you to stick to your budget. In addition, your projected income and expenses will show if you believe you are generating enough to pay your monthly expenses or if you need to incur debt to fund your cash withdrawals.

2. Fill in the following information on the worksheet for projected income and taxes:
The next step is to enter your predicted gross (pretax) income figures. Your principal employment, a second job, any interest or investment income, and any alimony and child support are all sources of income. Income can fluctuate from month to month for a variety of reasons, including reduced hours, overtime compensation, bonuses, commissions, or seasonal work. Estimate the average monthly income as best you can.
Estimate all of the taxes deducted from your paycheck after your income. Include your federal and state income taxes, as well as your social security responsibilities. Include any additional forms of income, such as interest or dividends. Make a monthly estimate of these taxes.

3. Determine Your Projected Cash Flow:
– Add up your estimated expenses.
Total your expenses by adding the subtotal amounts from each expense category.
– Add up your estimated net income.
Subtract your total taxes from your total gross income to arrive at your entire net income.
– Maintain a balanced budget.
Take your total expenses and divide them by your total net revenue. Do you have a profit or a loss?

4. Gather all of your receipts and expense records: As you go through your bills and receipts, there may be some that you can’t find. That’s OK.
Begin keeping all of your records in an orderly fashion. You may do it the oldfashioned way by storing copies of all your bills in manila envelopes, or you can use an internet tool like Mint or one of the many other free online budgeting systems. Create an envelope for each major spending category and make it a habit to place all receipts in the envelopes at the end of each day. Even if you utilise an online application that requires you to connect your bank and credit accounts to the system, not all of your costs will be displayed. Because cash purchases must be physically entered into the online system, whether you utilise an online system or not, you must preserve your receipts in good condition.

5. Enter Your Actual Monthly Expenses: After gathering all of your bills, receipts, and bank records, begin filling out your worksheet.
If you can’t remember exactly how much you spent on something, guess it as best you can. Pay close attention to the expense items on your worksheet that you pay annually or on a regular basis. It’s easy to overlook them because you don’t spend money on them every month. To calculate yearly expenses, take an item’s annual expense and convert it to a monthly figure. For example, if you pay $900 for car insurance in a year, divide by 12 to get the monthly price, which is $75. Examine expenses that vary seasonally, like as your utility bills, as well. If you know the dollar number indicated for the most recent month is not typical of what you normally spend, make your best estimate for your average monthly expense and keep careful track of that area.

6. Calculate Your Income and Tax Obligations: – Gather all of your income and tax records.
Gather your most recent pay stubs. Paystubs for a onemonth period that best depicts your usual income should be used. Include all revenue sources. – Fill up the blanks with your exact monthly income and taxes.
Fill out the spreadsheet with your actual gross income and tax deductions. On your paystub, your taxes should be properly itemised.

7. Determine Your Actual Cash Flow: Add together your actual expenses.
Total your expenses by adding the subtotal amounts from each expense category.
– Add up your actual earnings.
Subtract your total taxes from your total gross income to arrive at your entire net income.
– Maintain a balanced budget.
Take your total expenses and divide them by your total net revenue. Do you have a profit or a loss?

Examine Your Cash Flow

You put in a lot of effort to create a precise personal budget worksheet. You can now see whether your cash flow is positive or negative, and how much it is. Your initial budget spreadsheet will not be refined. You have most likely overlooked some expenses. As a result, you must prepare spreadsheets for a threemonth period. Your monthly modifications will increase the correctness of your worksheet.
Completing the spreadsheet over a period of months also provides a strong foundation for comparing your predicted income and cost totals with your actual totals.

Keep the following questions in mind as you work through your worksheets:

1. Do I have a positive or negative cash flow?
2. How do my actual income and expenses compare to what I projected?
3. Am I managing my resources effectively in order to pay down my debts and grow my savings?

Positive Cash Flow vs. Negative Cash Flow

Do you make more money than you spend each month? Great! Is there, however, an area where you were unaware you were spending so much money? In which areas may you cut back?
Although your monthly cash flow is a key indicator of your financial status, you need also consider your total liabilities and assets. It is conceivable to have a positive monthly cash flow while having carrying a significant amount of debt. You are simply need to make the minimum payments on your credit card debt. If you are incurring credit card debt, you may still be able to make the minimal payments and remain cash flow positive.

Keep in mind that raising your debt load will not only reduce your net worth, but will also raise the amount of interest and debt fees you must pay. Instead, use your positive cash flow to pay off your bills and become debt free.
If you are spending more than you earn, you should cut back on your spending. Examine your budget worksheets thoroughly and identify places where you may increase your cash flow. If you are surviving by incurring credit card bills, you may face major financial difficulties in the future if you do not limit your expenses.

Actual Cash Flow vs. Budgeted Cash Flow

Compare your planned budget to your actual cash flow. This assists you in identifying areas where you may have over or under budgeted. It can also show problem areas and areas where you are overspending. For example, you may have budgeted $150 for entertainment but instead spent $300. Don’t get disheartened if your numbers don’t match right away. Instead, utilise the data to determine why you overspent or budgeted incorrectly. Remember that comparing what you planned to what you really spent can, over time, increase the accuracy of your anticipated budget and build your discipline for keeping to your planned budget.

The chart below illustrates one way to look at this comparison. It compares expected and actual monthly spending for one family. It should be noted that the family’s estimated budget for housing, domestic expenses, and unsecured debt was surpassed.

The next step for this family, as well as for you as you analyse your spending, is to:

– Carefully examine any areas where actual spending exceed budget forecasts.
– Go over the preceding section again.

The next figure focuses on home debt as a percentage of income because it is most people’s primary expense. Revolving and unsecured debt are also included, as they are needed to calculate your debttoincome ratio when applying for a mortgage. Savings are included since everyone has to save money for both short and long term purposes. Use these metrics to examine your cash flow and make necessary changes to your spending habits.

Paying off debt and accumulating savings

You have finetuned your cash flow management, improved your financial situation, and raised your cash flow by building your personal budget. You can then use the funds to pay off debt, construct an emergency fund, or build an investing portfolio. Saving and investing properly allows you to prepare for and achieve costly goals such as purchasing a home, paying for a college education, or establishing a sound retirement fund. While it may appear hard at first, it actually consists of four rather straightforward steps:

1. Spend less money than you earn.
2. Have at least four months’ worth of net income set away in case of an emergency, unexpected loss of income, or illness.
3. Invest your available cash flow in assets that will appreciate over time to build longterm wealth.
4. Evaluate and reassess on a regular basis to ensure that your financial strategy remains intact.
Few people tread financial water; they are either pushing forward or drowning. Budgeting properly increases your chances of getting out of debt and having a good financial future.

Continue to keep track of your spending.

You should not cease tracking your costs just because you computed the amount you spent previously. Continue to track your expenditures to see if you’re on track to meet your goals.
Make checking your financial health a regular habit.

2. Make use of internet budgeting tools and bill pay.
Keeping track of all your expenses, bills, and receipts can be time-consuming. While the traditional manila envelope technique still works, it makes more sense to take use of modern technology and use online bill pay and online budget tools that will automatically record your transactions online for you. This will save you time and help your organisation. Consider using apps like Mint, Mvelopes, Buxfer, or Budget Tracker.
3. Establish appropriate objectives
Expect your spending patterns to shift gradually. Set sensible goals that you believe you can achieve. If you used to spend $100 on movies every month, aim for $75 instead of $10 at first. If you find your first goal too simple, establish a more difficult target for yourself the next month. By reaching your goals, you’ll get momentum and the desire you need to transform your financial lifestyle and then maintain it.
4. Give yourself a reward
Reward yourself for reaching particular milestones on a regular basis. This keeps you motivated. Of course, do not overindulge yourself and waste your savings. For example, if you saved $200 by eating out less, rewarding yourself with a $200 lunch will put you back in the same situation you started in.
Other money-saving ideas to help you meet your financial objectives:
– Use cash or a debit card instead of a credit card to prevent spending more than your income. – Make a shopping list and buy only the goods on it. – Compare costs, especially for pricey items.

Getting Rid of ‘Unhealthy’ Debts

Debts that are Healthy vs. Unhealthy
Debt management is a critical component of budgeting. While almost everyone has some debt, only five types of debt are healthy:

1. Student Loans Because they help people advance their education and increase their earning potential in the future.
2. Mortgages Because owning a home is an asset that can help you increase equity and net worth.
3. Medical Bills Necessary Because one’s health always comes first.
4. Business Debts Because they are frequently required in order to establish a business and future earnings.
5. Automobile Payment Because financing a car is sometimes the only method to buy one.

Keep in mind that good debts do not give you free rein to spend irresponsibly.
Take out student loans just for schooling that can help you achieve specific goals. Take out a mortgage only if you can afford it, and never buy a larger home than you need. Don’t take on a car payment that consumes too much of your income. If you are going into debt to fund a business, be sure you have a good business strategy and budget.
Other sorts of debt, particularly credit card debt, can cause more difficulties than they solve. In contemporary society, credit cards are both convenient and useful. Even if you are not in debt, a credit card is required to shop online, rent a car, or reserve a hotel stay; most people must carry at least one credit card. Too many credit cards are bad, especially if you use them to incur large amounts of debt. Carrying credit card balances means you could be paying hundreds of dollars in excessive interest costs for products that may have no long-term benefit.
This emphasis on long-term value is the most reliable indicator of whether a loan is healthy or unhealthy.
Healthy debt has longterm worth and is associated with a longterm objective (for example, a mortgage allows you to become a homeowner). Even under these conditions, you should not take on more debt than you can comfortably service each month.

To avoid excessive credit card debt, consider if you will be able to pay the bill when it arrives before making a credit card purchase. If the answer is “no,” then the purchase should be avoided. You should also avoid using revolving debt (credit cards, personal loans, etc.) for items that will depreciate or will be “used up” (electronics, clothes, CDs, food, etc.). These assets will be gone long before the debt, yet the debt will still hang over your head. In addition, the interest you pay on these transactions raises the price. Would you buy the item if the cost was not the initial purchase price but the total cost including all interest? Your $40 pair of jeans could end up costing you $80 if you take years to pay them off.

Getting Rid of Credit Card Debts

If you have a credit card balance, you should immediately set aside your available cash to pay off your bad debts and prevent incurring extra interest. Use your budget as a roadmap to cut your costs and get out of debt. More importantly, you should immediately minimise your credit card use to avoid further debt accumulation.
This should take precedence over saving until the harmful debt is eliminated.

Strategies for repaying credit cards

1. If feasible, avoid paying the minimum payment each month. If you can pay more than the minimum amount, you can save hundreds or thousands of dollars in interest. Credit card interest rates can reach 29%39%! The larger your monthly payment, the sooner you’ll pay off your loan and the less interest you’ll have to pay. Consider a $10,000 credit card loan with a 22% interest rate. If you merely made the minimum payments (4% of the monthly sum), it would cost you $18,216 and take 14 years to be out of debt, owing to the fact that the minimum payment decreases each month as you pay down your debt.

2. Paying a certain amount each month could save you hundreds of dollars and repay your debt in significantly shorter time than paying the minimum. For the identical example as above ($10,000 debt and a 22% interest rate), a consistent payment of $400 per month would cost only $13,094, allowing you to become debt free in three years.

If you have many credit card balances and can afford more than the minimum payment, you might examine the following strategies. Both techniques require you to continue paying the same monthly amount toward your debt until it is entirely paid off. Once a credit card is paid off, do not lessen the amount you pay toward your debt. Maintaining the same monthly payment (or even raising it) will help you get out of debt faster and minimise the total cost of your debt.

1. Avalanche The avalanche strategy entails paying off credit cards in the order of greatest interest rates. Once you’ve determined how much you can afford to pay each month, set aside enough money to merely make the minimum payment on each credit card. Then, use the leftover funds to pay off the credit card with the highest interest rate. Once you’ve paid off the first credit card, apply every dollar you used to pay off the highestinterest card and add it to what you were already sending on the second highestinterest credit card. Continue to use this technique and pay the same amount toward your debt each month until all of your debts are paid off. Using the avalanche method can result in higher long-term savings by paying less interest.

2. Snowball The snowball strategy is paying down the smallest amount of debt first. Budget enough money to pay down the minimum payment on all cards, much as the avalanche approach. Then, use any leftover funds to pay off the credit card with the lowest debt. After you’ve paid off your first credit card, keep paying the same monthly amount you started with.
Apply the same method as with the first credit card: Pay only the minimum payments on the other cards while directing all remaining funds to your second-lowest debt. Although the snowball method is more expensive than the avalanche method, seeing even a tiny debt erased frequently motivates people to stick to the discipline of debt repayment.
If you are unable to make even the minimal payments on your credit cards, there are other options available to help you get out of debt.

1. Pay off as much debt as feasible with your savings and retirement income. Begin by paying off the account with the greatest interest rate (the higher the interest rate, the more of your money is eaten up without paying off principal), then work your way down to the account with the lowest interest rate.

2. If your employer matches your 401(k) contributions, temporarily stop contributing. Paying down highinterest debt first makes greater financial sense, especially when credit card balances have interest rates of 25% or above. Pay as much as you can towards your highinterest loans with the money you were using to put in the corporate 401k (k). Paying off your debts can be similar to generating a 30% return on your 401(k) assets!

3. Consider receiving a home equity loan or refinancing your mortgage to pay off your unsecured obligations if you own a property. has a comprehensive refinance information centre to assist you in evaluating and qualifying for a refinance loan, if this is a good decision for you. Paying off your unsecured debts with the proceeds of your home equity loan will significantly improve your financial status. This form of loan will almost always have lower interest rates than your unsecured loans, and it is usually tax deductible, lowering the effective interest rate even further.

4. If none of the above strategies work for you, you should seek expert debt management help. To get out of debt, you may need to enrol in a credit counselling programme or a debt settlement programme. If you can establish a severe enough hardship, you can file for bankruptcy as a last resort.

Long-Term Objectives

Goal-setting for schooling, retirement, or a new home
As you become more familiar with budgeting, your budget will assist you not just in spending within your means, but also in planning for long-term goals. When you look at the costs of long-term goals like retirement savings or acquiring a mortgage, they can be pretty intimidating.

However, by breaking down the expense into reasonable monthly payments, you may begin to take steps toward even the most ambitious financial goals. The first step is the most difficult, but if you commit and take the risk of becoming financially secure, you’ll be there before you realise it.

Determine a timeline for accomplishing your goals when you’ve selected them. Determine how much you need to save each month to meet your objectives. With that information, you can go over your budget and start searching for ways to cut costs and save for a new home, a major vacation, or paying off your student loans.

Don’t put off thinking about your retirement. The sooner you begin, the less you will have to budget each month to develop a sizable nestegg.

The Road to Financial Independence

You should now have a better idea of why a budget is necessary. You’ve learned that creating and sticking to a budget is a crucial tool for developing financial discipline, intelligently managing your money, and identifying and achieving your financial objectives.

This tutorial covers fundamental budgeting methods to assist you in better managing your income and expenses, as well as shedding unhealthy, unsecured debts.
Creating and sticking to a budget is not easy, but with the right discipline and devotion, you may avoid the pitfalls of excessive debt and more easily reach your financial goals.

Good luck, and keep focused on a prosperous financial future.