Personal Financial Budgets Are Boring as Hell
Man, creating a personal budget is a truly boring job for those of us who hate doing things like working out figures, averages and such like. It is a very important part of our debt reduction strategy however, to create a personal budget that gives a true reflection of the state of our finances.
Why Is a Personal Budget Important
Why is it so important to create a personal financial budget? Well, we all probably have a fair idea of how much money we spend each month, allowing for the general expenses, things like rent, taxes, utilities, food and travel. We also generally know how much money we have coming in each month, however, do you know how much you paid on your credit card last month or the month before? Do you know how much you spent on fixing the car when it broke down last month and had to get towed to the garage, and consequently how the money you spent on that unexpected expense limits the amount you can spend this month? No? Well, that’s probably because you have not worked out what your personal finance budget is.
Why Do I need to Create a Personal Financial Plan/Budget
Working out how much you have to spend each week, month or year is just good financial planning sense. Even if you are living debt free at the moment, some disastrous event could change that? Imagine what would happen if you lost your main source of income? Could a secondary source cover your main monthly expenses until the main source came back? What about if you had to make an emergency trip abroad or had to pay for expensive hospital bills?
We used to (or more accurately our parents and grand-parents) used to do this back in the day when things were not as easy as they are today. Back then, there were no credit cards to use in the “event of an emergency”. They had to plan and save for a rainy day. Putting by a small amount out of the weekly budget as a contingency, in the event of some unforeseen expense
How to Create a Personal Budget
Creating a personal budget couldn’t be easier, once you’ve done the preparation. Before starting it is a good idea to gather all the paperwork in your possession that relates to your financial affairs. This will include things like you bank statements and your cheque book. Gather your payslips from the past 12 months, and then get your receipts from purchases and bills from suppliers of your utilities, credit cards, car related service providers etc.
Once you have got all your paperwork together, make two piles. In one pile, put everything related to your income. In the other pile, put everything relating to your expenses.
It may seem like I am suggesting you start making your personal budget from the wrong point. When creating a budget, it is usual to start with an estimate of how much to spend in a given area, but with your own personal finance, you already know what you spend in all the areas of your life, so there is no need to estimate. Use the information you’ve collected to get a good idea of what money you spend, how much you save, and how much income you have coming in.
A rough calculation is enough to let you know whether you are spending more than you earn, and whether you have enough left at the end of each month to help in your quest to find ways to pay off debt.
Once you’ve listed your income, and outgoings and have a good idea of what is left each month, it is time to set some goals.
Goals and Personal Budgeting
Now we come to the crux of why it is important to create a personal budget. You see, since we live our lives from day to day, we really do have a better idea of what we spend and what we earn and how much is left over each month. We know whether we are sinking deeper into the overdraft month after month, or whether the credit card bill is going down or rising.
It is not enough to know this and not really do anything about it, if we are trying to reach a goal of debt free living. Debt free living means we are not paying interest on loans that are expensive and bleeding money out of our pockets. Debt free living is stress free living and we can achieve it, but short of wining a jackpot, we can only achieve it if we plan for it.
This is why we create a personal budget. This is why we endure the pain and boredom of collating all our receipts, payslips and bills. There are software packages that we can use which will help to calculate the totals or can provide useful things like projections and what if analysis.
The type of personal budget software that I am talking about can be as simple as a spreadsheet template, or a sophisticated piece of money management software that ties up with your bank account and keeps track of all your regular payments, but all rely on you doing that initial investigation and preparation work, so go get those bits of paper all together and start now.
Sorry I diverted a little, but back to goal setting. Let us say, your main goal is to buy a new car in the next 6 months, but in line with our debt free philosophy, the last thing you are going to do to enable you to buy this car is to take out an expensive car loan. Do you know how you are going to afford it? Well if you work out a personal budget, you will know when and where you money goes, and how much you can cut back on item a in the outgoings column and add the amount not spent to the savings column.
So for example:
You know you have £3000 in your savings account, but the car you want to buy costs £4500. This means that you are going to need an extra £1500 to buy the new car. You also now know, (since creating your budget) that you spend £100 per month on going out clubbing each month and another £200 per month on clothes. In order to save the extra £1500 for the car, you need to save an extra £250 per month, can you see where you can cut down now? Shaving £50 per month off the clubbing (perhaps only go out twice per month instead of 4 times) and drop the clothing allowance (you won’t need so much clothes if you’re not clubbing as much) there is the £250 you need to make up the balance to buy your new car. Easy!
Although creating a personal budget seems to be a long and arduous task, it’s easy to get the tools necessary to make the repetitive working out done, but you still need to do the preparation. Work out what your goals are, they could be big, they could be small. Your goals may be long term or short term, it doesn’t matter. A personal financial budget can help you achieve those goals sooner rather than later. We will talk more about financial goal setting in another post, later in the series on financial planning, I will also at some point review some of the personal budget tools available. For now however, lets stick with the basics, lets acquire the thinking and the knowledge that helps us to formulate our own personal debt reduction strategy, one in which personal budgets will play a very important role.
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Thank you for sharing this post. Planning finances is very crucial in our future. It’s not how much money we are making but what we do with our money is what matters.