CREATING AND sticking to a personal budget is a key part of being in control of your finances. It’s also essential in helping you reach your financial goals, be they saving for an expensive purchase, or investing as much as possible towards your future wealth.
Your personal budget needn’t be overly complicated to set up; just grab a pen, some paper and a calculator, and start by working through the initial steps below.
Simple Steps to Creating and Sticking to your Personal Budget
- List all of your monthly incomes and expenses
Begin by writing down a detailed list of any recurring incomes you receive each month. Then do the same with each of your monthly expenses. Be as detailed as possible. Include the expected date the money will be credited or debited from your account, as well as the typical amount.
Carefully go through all of your transactions for the previous three or four months. Make sure not to miss any regular payments which occur less frequently than on a monthly basis, such as quarterly subscriptions.
- Prioritize your expenses and determine which ones are essential
Highlight each of your essential expenses. Typical examples could include rent or mortgage payments, as well as utilities bills. Calculate the total payment amount for these essential expenses to work out your bare minimum monthly outgoings.
Next, number any remaining non-essential expenses in order of personal priority to you. For example, do you value your gym membership over your Netflix subscription, or vice versa? This will make it easier for you to identify how much you could potentially reduce your future outgoings by.
- Set a savings goal and allocate a portion of your income towards it
The key motivation for creating and sticking to a personal budget is by setting a savings goal. It’s important to have a target savings amount to aim for. But it’s crucial to also set a target date for reaching this amount. Without this date you’ll likely be less focused or determined to stick to your budget.
For each month, take your total income amount and deduct your expenses (both essential and non-essential). This will give you your disposable income amount.
Calculate how much you need to save each month in order to reach your target in time. Your priority should then be to ‘Pay Yourself First’ (PYF).
With the PYF concept, once you have set your budget and decided on the total amount (or percentage of your income) that you wish to save (invest) each month, always complete this transaction first. You can then only spend what is left over.
This way you will be investing in your future on an ongoing basis, and the regular payments will always pay dividends in the future.
- Find ways to cut costs on non-essential expenses
If you find that your disposable income is left looking a little depleted after deducting your savings or investment amount, it could be a good time to revisit your earlier list of non-essential expenses.
Take a look at the costs you rated lowest in priority. Can you live without them, at least until you reach your goal? Or can you make any changes or switch to cheaper alternatives?
- Be sure to allow room for social and leisure activities in your budget
It’s important to make sure you leave yourself some spending money for the fun things.
Finding yourself feeling guilty after spending money on a coffee or lunch with friends will be demotivating. This will make it trickier to stick to your target. If you budget wisely, you should be able to save while still enjoying life!
- Use a budgeting app or spreadsheet to track your expenses and income
You may find it easier to stick to your personal budget with the help of a budgeting app. Use the app to track your monthly income and spending, making it clearer to see where you spend most of your disposable income. This may help you to identify other ways you can cut costs.
We previously shared a list of Cashflow, Budgeting & Money-Saving Apps here, so be sure to see if any of them could be useful to you.
- Avoid impulse purchases
Impulse purchases can easily lead you to stray away from sticking to your monthly budget. If you haven’t budgeted for a particular purchase, and it isn’t urgent, it may be worth sleeping on it and deciding if you really need it the following day.
Food produce can often be the most tempting to impulse buy. How easy is it to stop by the supermarket for some milk but leave with bags full of other snacks?
Planning your weekly meals in advance is an effective way of preventing this. Buy everything you need for the week in a single shop. This will reduce your opportunity to impulse buy later in the week.
Also, always try to avoid food shopping when you’re hungry!
- Adjust your budget as needed to account for unexpected expenses or changes in income
We all occasionally face unexpected costs or unavoidable changes in our income. If this happens, make sure you update your budget as soon as possible to reflect this.
You may need to assess whether your goal is still achievable. Do you need to rethink the target amount, or perhaps change the date you’re aiming for?
- Review your budget regularly to ensure you are staying on track
It can be surprisingly easy to go over budget if you don’t keep track of your spending on a regular basis. Small purchases here and there can very quickly add up without you realising.
Get into the habit of reviewing your spending on a weekly basis. The sooner you notice that you’ve been overspending, the sooner you can make adjustments to correct this for the remainder of the month.
- Celebrate your successes and don’t get discouraged if you slip up
Mistakes happen. Some months you may accidentally overspend but you shouldn’t let this discourage you. Just try not to let it become a habit.
Find a way to reward yourself for each month you’ve managed to stick to your budget. This way you’ll be even more motivated to keep on top of personal finances.