A personal budget is a finance plan that allocates future income to your various needs. The idea behind this ‘Budgeting System’ is to give you the freedom of choice on how you spend money without feeling guilty because in reality, there are some necessary costs which have already been accounted for.
Some people hear the words ‘Personal Budget’ and think restriction, limitation and confinement. They imagine having to cut all spending and live on bread and water.
Instead, think of it as your spending plan. By planning how you’ll spend your money, you’ll feel liberated and be able to spend guilt free, knowing money has already been set aside to cover your expenses. By putting a plan in place, you’ll no longer feel like you’re going to run out of money before the end of the week or month.
So how do you prepare your personal budget? The first thing is to know where money comes into your account - whether through salary each month or income on investments such as stocks & bonds (or even revenue generated by an investment property). Your budget should be set up for 12 months and all income and expenses broken down on monthly basis.
Ensure that your budget contains the following components:
1. Income. This includes business drawings, salary/wages, interest, dividends, rental income, and any other income you may receive. If you receive income weekly, multiply your weekly amount by 52 then divide by 12 to calculate your monthly average. If you receive it fortnightly, multiply by 26 then divide by 12.
2. Expenses. Expenses should be split into key categories, e.g. household, food, apparel, children, medical, insurance, transport, lifestyle, and debt repayment. Irregular expenses such as annual rates or insurance payments, school supplies and uniforms, or holidays, should be allocated to the month they’re paid. This allows you to plan for those months you’ll have higher outgoings than normal.
3. Monthly Cash Summary. This should show your cash surplus or deficit for each month as well as for the year. If your budget has resulted in a deficit, review your expenses and identify areas to reduce your spending.
4. Actual vs budget. You should be able to easily compare your actual monthly spend to your budget. Set aside an hour or two each month to input your actual figures and reset your budget for the remaining months if necessary.
The key to a successful budget is being completely honest about your spending habits. It's best practice, for example, to review your bank statements and realise where all of that money went so you can make adjustments in the future. Even small changes will add up over time!
The budget should be personal to you and your family and should reflect your overarching family goals. Your goal may be to reduce debt by spending less on lifestyle expenses. Or maybe you want to take a family holiday, so you reduce your food spend.
The key to achieving your financial goals is to understand where your money goes and develop better control over your money. Making a plan for your money and setting personal wealth goals will ultimately result in more money and less stress.
Are you feeling overwhelmed by money troubles? Do you want to take control of your finances but don’t know where to start? We have a simple solution for that. Enter your details below and we’ll send you our Personal Budget Template so you can start putting a plan in place.