The term ‘budget’ isn’t just limited to federal or government-related financial planning; it applies to personal financial planning as well. In fact, creating a personal budget helps you maintain control over your finances. It doesn’t matter whether you’re a student, a working professional, or a retired individual, establishing a personal budget will always assist you in managing your finances optimally. In this post today, we will guide you through the basics of creating a personal budget, simplifying the entire process with templates and examples!
What is a personal budget?
A personal budget is generally a monthly written statement that explains how your cashflows are going to be managed in that particular month.
Cashflows involve elements such as your:
The primary goal of establishing a personal budget is to remain in control of your finances and minimize the chances of going broke by the end of each month.
Step-by-Step plan to create a monthly financial budget of your own
Now that we know what a personal budget is, it’s time to move on to discover the steps that we need to create a foolproof budget on a monthly basis:
Step 1: Calculate your total income
It all starts with your net disposable income. Disposable income means, the total income that is at your disposal at the beginning of every month. This can be in the form of monthly wages, salaries, commissions, etc.
Step 2: Figure out your expenditures
Next step is to find out your estimated total expenditure for the month. Your expenditure can be broadly categorized into the following two types:
Fixed expenditure refers to all those spendings that you compulsorily have to incur every month. For example — utility bills, school/college fee, groceries, credit card bills, house rent, and so on…
These are also called unavoidable and recurring expenses.
Variable expenditure refers to all those spendings that you make out of your wish and desires. For example — vacations, dining out, impulsive purchase of non-essential items, medical / healthcare bills, house repair, etc.
Because it’s easy to ascertain your fixed expenses, make calculations based on this fixed component only. Variable expenditures can be later on adjusted from what’s left after deducting the fixed expenses.
Step 3: Formulate your budget statement
Finally, you have to subtract your fixed expenses from the total income. The remaining amount of money has to be rationally distributed amongst various needs, wants, investments, and savings related decisions.
Here it’s important to note that the famous 50/30/20 rule of budgeting might not be a good fit for all. Everyone has different level of expenses, personal financial obligations, and wealth accumulation goals.
Therefore, I propose the following three rules of budgeting for three categories of individuals:
- Tight budget – 60 / 10 / 30, i.e., 60% into needs, 10% into wants, and 30% into savings
- General budget – 50 / 20 / 30, i.e., 50% into needs, 20% into wants, and 30% into savings
- Aspiring budget – 30 / 20 / 50, i.e., 30% into needs, 20% into wants, and the rest 50% into savings
Here’s an example.
Suppose Mr. A has a monthly take-home salary of Rs. 80,000.
He has the following fixed expenditures:
- Credit card bill – Rs. 10,000
- Utility bills – Rs. 5,000
- Child’s school fee – Rs. 5,000
- House rent – Rs. 15,000
- Groceries – Rs. 10,000
- Transportation – Rs. 5,000
Disposable income = 80,000 – (10000+5000+5000+15000+10000+5000) = Rs. 40,000
The total fixed expenditure in this case is 50% of the total income. As per the general rule of budgeting, the 30% of the total income (i.e., Rs. 24,000) may be spent on your wants or desires. And, the rest 20% of the total income (i.e., Rs. 16,000) should be compulsorily saved or invested.
As we saw, depending upon his total fixed expenditure, Mr. A fell into ‘General Budget’ category – i.e. 50/30/20 budgeting rule.
Therefore, finding out your monthly fixed expenditures opens up the gateway to choose your ideal budgeting strategy.
In the above example, someone with a fixed expenditure of just Rs. 20,000 could easily stick with a bit more relaxed budget and could therefore use the remaining money for fulfilling wants and savings related goals.
I hope this post was useful. If you liked it, please spread the knowledge by sharing this post amongst your friends and family members.
I look forward to your comments below. Happy budgeting 🙂
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