Budget (Personal)

Creating a personal budget helps you understand, allocate, and manage your money. By knowing where your income goes, you can set financial goals and make better spending decisions. Surprisingly, many people don't use budgets and just guess where their money goes. However, personal finance software and websites like Mint.com and BetterBudgeting.com are making it easier to budget.

What is a Personal Budget?

A personal budget is a plan for how you will spend and save your money each month. It usually has three parts: income, mandatory expenditures, and discretionary expenditures.

Income

Income is the money you earn. For most people, this comes from their paycheck. Other sources can include alimony, child support, interest, dividends, rent, and royalties.

Mandatory Expenditures

Mandatory expenditures are bills you must pay. These start with basic needs like food, water, shelter, and security. Common mandatory expenses include:

• Mortgage or rent
• Basic food and medicine costs
• Utilities (heat, electricity, water)
• Taxes
• Car payments
• Commuting costs
• Telephone bills
• Childcare expenses
• School supplies
• Clothing
• Health insurance

Paying off past expenses like credit card debt and student loans is also mandatory. Some people consider cable and internet, personal care, and entertainment as necessities, but these can be adjusted based on individual needs.

Discretionary Expenditures

Discretionary expenditures are for non-essential items. These include:

• Movies
• Dining out
• Travel
• Expensive clothing
• Jewelry
• Other luxury purchases

Creating a Simple Monthly Budget

Here's an example of a simple budget layout:

• Net income: __________
• Housing expenses: __________
• Basic food costs: __________
• Automobile expenses: __________
• Debt repayment: __________
• Clothing: __________
• School/childcare: __________
• Insurances: __________
• Entertainment/travel: __________
• Savings/investment: __________

Benefits of Personal Budgeting

Understanding Spending

The first step in budgeting is understanding where your money goes. The U.S. Department of Labor's annual "Consumer Expenditures" report can help you compare your spending with others.

Setting Priorities

Budgeting helps you set spending priorities. Some experts suggest using a spending plan instead of a strict budget. A spending plan is more flexible and allows you to make choices about where to cut or increase spending.

Establishing Goals

A budget can help you set financial goals like getting out of debt, saving for a big purchase, or building an emergency fund. Unfortunately, many people struggle to meet these goals because of temptations and pressures to spend.

Reducing Unnecessary Expenses

Personal budgeting can help you avoid unnecessary expenses like bank fees and penalties. Many banks make a significant portion of their income from fees. By managing your money better, you can avoid these charges.

Building a Contingency Fund

A good budget includes a contingency fund to cover unexpected expenses. Financial experts recommend saving at least three months' worth of expenses, and during tough economic times, six months' worth is better.

Conclusion

Personal budgeting gives you control over your finances, improves your quality of life, and reduces stress. By understanding your income and expenses, setting priorities, establishing goals, and reducing unnecessary costs, you can achieve financial stability and peace of mind.