Are you looking to improve your financial situation? Maybe you are looking to get out of debt? Or maybe you want to save for that next vacation or plan for your child’s education? If you answered yes to any of those or if you are interested in setting and achieving your own financial goals, you’ve come to the right place. A good budget in place can help you stay on track and stress less!
The key considerations to a good personal budget are the following:
- Understand Your Income
When you have a clear understanding of your income, you can better plan on how much money you have coming in and how that money can be allocated. Did you know that income comes in more forms other than wages or salaries? In fact, the IRS has 25 different types listed out. For example, income from stock options, dividends, capital gains, and so on are considered income as defined by the IRS.
For most people, income will come in the form of wages and salaries. Do keep in mind that if you get income from dividends, business income, etc.…please include this in your monthly income.
- Understand Your Expenses
Now that we understand our income pretty well, we need to dive into our expenses. Taking time to property understand your expenses will bring you both clarity and control. For expenses, we will want to write expenses and allocate them on a monthly basis. Below are some sample expense types:
- Electric (12 month rolling average + 10%)
- Medical/Dental/Vision Insurance
- Entertainment (Netflix, Hulu, Cable, Going to Movies, etc.…)
- Phone Service
- Internet Service
- Car Payment(s)
- Car Insurance (Bi-Annual Fee – Six Month Policy)
- Car Taxes (Annual Fee)
- Tax Prep Fees (Annual Fee)
- Vacation Savings
- Emergency Savings
- Savings – Child
- Groceries/House Items
- Family Dining/Eating Out
- Dining Out – For Work
- Student Loans
- Spending (i.e. Gifts…)
- Additional Toward Debt/Savings Goals
- Gas – Assume $3.00 a gallon
- Auto/Home Maintenance
- Child Care
- Credit Card/Personal Loan Payments
Now that we have these down, you have the start to a basic budget as you know your income and your expenses.
- Get Pay Off (Debt) Goals Established
Unless you’re independently wealthy, you most likely have debt. If you do have debt, you will want to create pay off goals for your debt. Whatever amount of funds you decide to put toward debt/savings goals, I do recommend the following ration: 80% of funds on debt goals and 20% of funds toward savings goals.
There are two main types of debt in regards to budgeting and these are called short-term and long-term debts. I consider short-term debts to be paid off within a 12 month period and long-term debt to be paid off beyond a 12 month period.
I know it’s hard to cover every single type of debt, but I think it is important to discuss some common ones that you could come across. Below are some examples:
- Credit Card
- Personal Loans
- Car Loan(s)
- Student Loan(s)
- Get Savings Goals Established
For a lighter change of subject and something a bit more fun to talk about, let’s discuss savings goals. Similar to establishing debt goals, savings goals also need to be established. As mentioned before, any funds going to debt/savings should represent 80% for debt goals and 20% toward savings goals.
For savings goals, you need to create short-term and long-term savings goals. I consider short-term savings goals to be achieved within a 12 month period and long-term savings goals to be achieved beyond a 12 month period.
- Extravagant Vacation
- Large House Updates
Now that we have our monthly income, expenses, debt goals, and savings goals established, we can now move on to creating our bi-weekly schedule.
- Create Bi-Weekly Cash Flow Schedule
Now let’s get more granular and focus on your cash flow. What is cash flow? Well, cash flow is defined by Merriam-Webster as “a measure of an organization’s liquidity that usually consists of net income after taxes plus noncash charges against income.” This is a fancy definition and it is used a bit differently in an organization, but for our purposes, it basically means that if you have money left over after you pay all your expenses, then you have positive cash flow.
In our case, we are creating a bi-weekly cash flow schedule because some expenses are higher than others and some are due at different times from others. By creating a cash flow schedule, we can eliminate being left with a large bill due prior to receiving our next round of income. You need to setup your cash flow schedule so that you are balancing your expenses evenly over each pay period while not missing due dates. Please note that if you are paid monthly, weekly, or any other way, set your schedule up in that manner. I am using bi-weekly as that is the most common.
I also recommend using an envelope system. What I mean by an envelope system is that you have physical money envelopes. You would use the envelopes for flexible spending categories such as dining or entertainment as well.
- Track Your Progress
It’s important to stay committed and track your progress. There are going to be times where you need to make adjustments as no month is standard and no one is perfect. This step will help check your spending activity against your budget to make sure you are financially successful.
Tracking progress is not only important to keep your budget nice and updated, but it gives you a good sense of accomplishment and motivates you to stick to your budget. It also allows you to keep a close eye and delegate extra funds to your debt and savings goals as discussed before.
You can track your progress by running a report from your banking website and compare it to your budget to see what areas you are spending more or less in and then make adjustments.
I hope that you found this information valuable.
If you would like a template to get you started on your budget, please see the attached monthly budget template (attach free version of student budget template) that complements key considerations one and two. If you would like to learn more and take my full course on budgeting which includes all steps mentioned above, click here.