How To Make A Better Personal Budget
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?
Quicken has a nice budget management feature. I don’t personally use a budget as I am well established & discplined in my ways… I do however track every expense within Quicken and it tells me about upcoming payments which I need to account for and allocate funds.
This is not a “free” option but it does make things like seeing where you money goes every month a snap. The accountants reports & investment trackers are also very good at tracking your losses! 😉
I think another reason people give up on personal budgets is because it get depressing to see how much of their money goes to servicing debt. In other words, how many things they can’t buy, because the money is paying for past impatience.
So true. Nice way of putting it.
For me, a budget is a structure to help me reach my financial goals.
I personally budget based on the previous month’s income. So the first thing I do with each paycheck is save using my savings snowball and then I set aside the money for my monthly budget out of the paycheck. Any money that is leftover at the end of a month is also sent to savings.
This means that the money from my January 31st paycheck will send $250 to vacation savings, $250 to vehicle replacement, and then money to the first bucket in my savings snowball, which right now, is replenishing my emergency reserves. The January 31st paycheck also covers the spending plan for the entire month of February. And lastly, any extra money from my January spending plan is also sent to savings at the end of the month.
Having a personal budget not only helps you to see how you’ve spent your money in the past it is useful when planning ahead, particularly if you are taking on new re-occurring payments or a change in income. The difficulty is maintaining an up to date and accurate record of your income and expenses on a regularly bases.
Yes I also use an Excel spreadsheet that lets me see very easily how much money the bank thinks I have (i.e. my bank statement), the money that I actually have (bank statement minus the funds that I have committed but that haven’t cleared the bank yet) and how much I will have at any time in the next 2 years. I budget out 2 years because I feel that it helps me make much better decisions. Of course everything is flexible and I can adjust my numbers. Because I’m paranoid about overdrafting or not having budgeted enough (I HATE surprises!), I build in “reserves”. For example, I average out the cost of my utilities for the whole year and if one month my water bill is only $64 but I had budgeted $100, then I report an additional $36 to the next’s month water bill budget. It works very well with electrical costs because at some point during the year I will have a bigger bill than anticipated for some reason. I’m trying to teach my teens to use this system but they think they don’t NEED it. Yes, they do.
Estimating and matching expenses to revenue (real or anticipated) is important because it helps small business owners to determine whether they have enough money to fund operations, expand the business and generate income for themselves.
I use a little known great online personal budgeting web app called Out Of The Dark (OOTD) Budgeting, it offers easy budgeting and expense tracking side by side on one page, some great features like Cash Put-Aside management and the Credit Card Debt Terminator built into my budget, it’s 100% safe because I don’t give out access to my bank accounts or even my personal identity, and it’s unconditionally free.
I use a spreadsheet (have done so for many many years). By copying and pasting, I can extend the column for 10-20 years. Although I just use current figures, it gives me a good indication when I do a ‘what if’ scenario. What if I wanted to replace a vehicle; how long would it take to pay it off? To save up for it? Can I afford to spend XX on a vacation?
Keeping expenses under control is very important. And to do that it is mandatory to maintain a monthly budget. I am doing this for a few years already and I say that it pays off. I started first with an excel sheet, later I realize there are free online tools which helps you to do that.