A personal budget is a breakdown of your income and spending for a specific period. If you want to keep track of your spending and achieve your financial objectives, you need to make a perfect personal budget that takes into consideration your income, daily expenses, repayments (if any) and monetary goals you would want to reach.
How to create a personal budget?
1. Calculate your net income
Calculating your net income is the first step towards creating a personal budget. If you are a salaried individual, calculate your take-home pay after all the deductions. If you are self-employed with various sources of income, include them after deducting taxes, if applicable. In the case of varying income, consider the lowest-earning month in the past year and take it as base income.
2. Track your spending
To begin, make a list of your fixed expenses. These are your monthly bills and payments. The next step is to make a note of all your variable costs, such as food, fuel, and entertainment, which might fluctuate from month to month. This is an area where you might be able to save some money. Credit card and bank statements are ideal places to start since they itemise and classify your monthly expenses.
3. Determine your goals
Make a list of all the financial goals you want to achieve in the short and long term before you start sorting through the data you’ve collected. Short-term goals should be completed in less than a year. Long-term goals, such as retirement savings, your child’s education or planning for that exotic vacation, might take years to achieve. Knowing short term goals could help you to cut down unnecessary spends in the near term. On the other hand, knowing your long-term goals would help you to plan your investments better.
4. Create a plan
Use the list of variable and fixed costs to estimate how much you’ll spend in the future months. You can estimate how much money you’ll need to budget based on your fixed costs. When attempting to anticipate your variable expenditures, use your previous spending habits as a reference.
You might further divide your spending into necessities and desires. If you drive to work every day, for example, fuel is most certainly a must. Here fuel is a necessity. On the other hand, a monthly music or movie subscription may be considered a desire. In case of any adjustments, it is better to make a note of necessities and desires.
5. Adjust your spending habits
Find areas in your variable expenditure that you may work on if your spending is more than your income. Look for ways to cut costs.
6. Review your budget
It’s crucial to evaluate your budget frequently to ensure that you’re on track. You may also compare your monthly costs to those of others who have similar spending habits. This is how you build a personal budget.
Preparing a plan to meet your financial goals
Following the above steps could prove beneficial for you in achieving your goals. Along with a robust budget plan, you also need to develop an equally robust goal-based investment plan to compliment your efforts to save money. There are many avenues available where you can invest your savings and earn attractive returns. Sign up with a financial advisor to explore more options and get bespoke investment plans that take into account your risk appetite.