One of the best ways to manage your spending and begin creating personal wealth is by creating a budget. A household or personal budget is simply a list of all anticipated income and expenditures. Most household budgets span one month since bills typically recur on a monthly basis.
Today I am taking a break from my usual topics of cybersecurity and programming to talk about personal finance instead. I have recently revamped my personal budget and developed a process for managing my expenses. This article details my thought process so hopefully you can avoid some of the mistakes I’ve made.
Why you need a personal budget
Regardless of how much money you earn each year, it is important to closely monitor your spending. It is so easy to blindly spend everything you earn (or even more) and not have any idea where the money went. A personal budget helps limit the mindless spending so you can build a savings and meet your financial goals.
The goal is to determine how much money is coming in and where it is going each month.
Once you have a solid overview of your monthly spending you can find areas where you may be overspending. Understanding your finances is the first step to managing them. Saving money anywhere you can is even more important when you have limited income. The best way to save money is with a simple and clear personal budget.
There are many ways to create a personal budget, and my favorite is a simple Excel spreadsheet. Using a spreadsheet requires a little extra work but keeping a finger on the pulse of your finances is the best way to manage spending and grow your wealth.
Creating a personal budget in 5 simple steps
1. Review past income and expenses.
Before creating spending limits, you need to understand both your income and expenses. Create a column in your spreadsheet and record all of your monthly income sources such as a regular paycheck, or from an investment account. Mow your neighbors grass once a week? Make sure it gets recorded. Create another column and record all of your monthly expenses. This may include utility bills, credit card or bank statements, as well as going through past receipts.
The more in depth you are in this first step the more complete and accurate your budget will be. If you can, go back 1 or 2 months. You want to get an idea of what an average month looks like in terms of expenses. The more information you collect the more accurate your initial budget will be.
2. Separate recurring and variable expenses.
Once you’ve recorded all your income and expenses you will want to separate your recurring or fixed expenses from your variable or discretionary expenses. Fixed expenses stay consistent month to month and usually represent your needs. Examples of fixed expenses are a monthly mortgage, utility bills, student loan payments, groceries etc.
Discretionary expenses on the other hand represent our wants. These are the things we could probably live without and the amount we spend typically fluctuates. Examples of discretionary spending include going out to eat, watching a movie in theaters, online shopping, and entertainment.
3. Create categories for your expenses.
With your fixed and variable expenses highlighted it is time to start assigning categories to your spending. You want to group your expenses into categories so you can manage spending for each category.
4. Create budget limits for each category.
Based on the information you gathered you should have a pretty good idea of your current spending in each category. If your income is greater than your expenses then you have money left over to save. On the other hand if your expenses are greater than your income then you are losing money each month and could start going into debt.
When this is the case you will want to assign spending limits to each category. Do you spend a large chunk of your income going downtown each weekend and drinking at bars? Cutting back on some of these discretionary activities can have a drastic impact on your financial situation. The money saved by not going out each weekend can go towards a credit card to pay it off faster, or into a savings account for emergencies.
5. Use your new budget and monitor your spending.
Take your budget our for a spin. Keep an eye on your spending throughout the month. Your budget may not be perfect the very first time. You may need to make adjustments as you find out what works for you and what doesn’t. An easy way to track your income and expenses is with the use of a budgeting app. Mint automatically tracks your spending, allows you to set budget limits, and alerts you when you are nearing your spend limits. The best part is that this all happens automatically so you never need to keep track of expenses manually.
Having a solid budget will put you well on your way to achieving your personal financial goals whether that be saving for retirement, putting a child through college, or quitting your job!
Build a personal budget and grow your wealth!
Whether you are making 6 figures a year or 4, managing your spending by sticking to a budget is the fastest way to grow your savings and personal wealth.
You’ve taken the first step to controlling your spending by deciding to create a budget. The next step (and admittedly the hardest) is sticking to your budget. The satisfaction you feel when you work hard and meet your savings and investment goals is second to none.
For the programmers and investors amongst you, check out my article on stock analysis with Python.