The secret to financial success is to spend less than you earn. Most financial experts agree that in order to get a proper handle on your finances, you need to make a personal budget and track every penny you spend.
The problem is we’re not very good at sticking to a personal budget because we take the wrong approach. With a traditional budget, the only real objective is to have money left over at the end of the month.
We assume that as long as our expenses don’t exceed our income, we can spend every dollar that comes in. And we give up on tracking our expenses too quickly because it’s tedious and boring.
A personal budget should be about more than just figuring out if your income exceeds expenses.
Building Your Personal Budget
I use a zero based budget that accounts for every dollar that I earn. With this method, I’m creating a plan for how to spend all of the money that comes my way. Here’s how it works:
With a zero based budget, the objective is to have a personal budget with an overall bottom line of zero. Like a traditional budget, you want to have money left over at the end of the month, but the goal here is to make a plan for your income so that every single dollar is either saved or spent.
I used this free budget spreadsheet that I found online, and customized it for our own situation.
To get started, I plugged-in all of our income sources and then listed all of our fixed monthly expenses like our mortgage payment, car payment, insurance and utilities. Then, based on a six-month average, I entered all of our variable monthly expenses like groceries, gas, clothing and entertainment.
Prioritize Your Goals
Using a zero based budget approach, you need to determine how every dollar is spent. The next step is to prioritize your goals for saving, investing or reducing debt until you reach a bottom line of zero.
With your personal budget, that might look something like this:
- Transferring $150 per month to a high interest savings account to build an emergency fund
- Making $300 per month in RRSP contributions
- Saving $100 per month in your child’s RESP
- Paying $250 per month towards your line of credit
Once you enter all of these numbers you will have a complete forecast of your income and expenses for the entire year. Now you can see a 12-month snapshot of your finances.
Don’t get me wrong, I’m not against tracking every penny you spend. In fact, when you combine proper expense tracking with a zero based approach; your personal budget becomes a powerful financial planning tool to help you achieve your goals.
Do you use a personal budget to help track everyday spending and to estimate your future income and expenses?