Personal Budget Planning

Personal budget planning is not something that we look forward to – it requires us to face some grim realities and forces us to take some painful decisions. However, we cannot deny that budget planning is one of the most essential financial skills that we need to develop. And though we might find it difficult at first, understanding personal budget planning will have a positive impact on our financial future.
Many people believe that budgeting is about making sure that expenses do not exceed income and that there is no build-up of debt. But budgeting is much more that – it is about making sure that other financial goals like a change of career, a college education, a home and retirement needs are also taken care.

There are two main components of a personal budget – your income and your expenses.

Let us first start by understanding what your income is. Your income is the total amount of money you bring in – from the job you have, any extra income earned by freelancing, bonuses, investments, rental income and so on. You should typically include only those sources that are guaranteed to provide you with this income from month to month.

Next, we have to understand what your expenses are. This, naturally, will be the longest section in your budget. List all the items that you typically spend on every month. Some of the most common expenses are – rent or housing costs, utilities, debt payments like credit card payments, mortgage loan repayments, etc., food and entertainment, savings and investments, insurance and taxes and many more. If you are not sure whether you have listed all of them, use receipts, cancelled checks, bank statements to see what your most common expenses are. Try to itemize the expenses under different categories so that you can easily see where most of your money is going and where you can cut back on the expenses.

If you are bringing in more money than what you are spending, you are doing well but you could now try to increase the amount you are saving. On the other hand, if you are spending more than what you are earning, you are slowly accumulating debt. You have to change tracks right away and the only way of doing so is by cutting down on your expenses. While some, like your student loan repayment or mortgage loan repayments, are essential expenses, you can look at ways to cut down your food and entertainment expenses; by being more careful, you could reduce your utility bills, you could cancel your newspaper subscription and go to a library and read there. Think of different ways in which you can reduce your expenses so that you start spending less than what you earn.

Once you have your budget plan ready, you have to take the most important step of all – implement it! Remember, having a budget plan is crucial to your financial success but a plan on which no action is taken is no use at all. Think of your future once you have achieved your financial goals and let that inspire you to follow your budget.