A simple yet effective money plan? In financial circles, it is better known as a budget. While we are familiar with budgets at work, how many people actually make their own personal budget?
What is a Personal Budget?
A budget is a plan for spending money. We love to spend buy very few can control their spending. A personal budget is a way to balance the money you have against the money you will spend. You decide what you will spend on, how much to spend and how much to save.
Your plan is based on your income and expenses. Since every person's income and expenses differ, you plan needs to fit your situation based on your Goals, Needs and Wants.
Here are some examples:
GOALS |
|---|
Own a car |
Own a home |
Get married |
Set up own business |
Provide good education for children |
Retire comfortably |
Contribute to charity |
NEEDS |
Food |
Shelter |
Clothing |
Quality time with family |
Car or Motorcycle |
Mobile phone |
Computer |
WANTS |
Fine dining |
Resort-like bungalow |
Expensive branded clothes |
Expensive vacations |
Luxury car |
Latest phone |
Most advanced computer |
As you can see, sometimes it is hard to differentiate between Needs and Wants. Our basic needs change with time and may include more than just food, shelter and clothing. A salesperson may work better with a car. In today's IT age, mobile phones are practically indispensable, as are computers. But do you need a $100,000 car when you can buy a cheaper one for $10,000? The same goes for mobile phones and computers.
We only Need a few things but our Wants are endless! That's the difference between the two.
Why Should I Have a Personal Budget?
Anyone who has income and expenses needs a budget. Having such a plan helps you use your money to reach your goals and avoid financial trouble.
How Do I Start a Personal Budget?
Firstly, list your Income and Fixed Expenses, which are expenses that do not change from month to month, such as rent, home or car loan payments and insurance premiums. Other expenses are Variable, that is, they change every month like utility bills, clothing and entertainment.
Next, keep track of how you are spending your money. Write down what you buy and how much you spend. This will take some time and effort but it is worthwhile to see where your money goes. Do not be too surprised by what you will learn about yourself and your money!
Every time you spend, write it down in your planner (use the Excel spreadsheet if you are tech-savvy). Record everything down, from paying bills, filling up the car, and even an apple from your supermarket.
At the end of the month, total it all up. Get your children involved as this will not only enhance their math skills, but also expose them to the concept of budgeting.
How Do I Decide Where to Spend My Money?
By tracking your spending, you can see where your money goes. It is helpful to discuss your spending with a counselor or someone you know who manages their money well.
A big part of your money goes towards basic necessities like food, housing and clothing. Although these are Needs, you can choose the amount to be spent. Too many new clothes, new furniture or new toys for your children are Wants. While you might enjoy buying these, you can live without them.
Ask yourself:
- Which spending can't be reduced?
- What is the minimum I need to live on?
- Which spending is Needs and which is Wants?
- What would happen if I delay some of my spending?
- Can I buy cheaper alternatives?
Set short-term and long-term goals. Short-term goals might be: limit money for food to $10 per day, use public transportation to work and check the newspapers for free family entertainment. Long-term goals might be: save $1,000 for a new laptop or pay up your debts.
How Do I Stick to My Budget?
This is the hardest part! It will take practice and self-discipline. You are the only one who can maintain your plan. Here are some suggestions that can help you stick to your budget:
- Pay necessary bills first. If possible, try to stretch your bills out over the month so they are not all due on the same day.
- Save some money every month, no matter how small. You just want to form that habit. Make a list before you go shopping. When you shop, remember the difference between Needs and Wants.
- Plan ahead and buy items on sale. Check out discount stores and garage sales. Share reusable items with family and friends.
- Stay away from stores or places where you know you will waste money!
- Get tips from family and friends on how to save.
- Continue to keep a monthly record of your spending and keep reviewing it.
ld I Change My Budget?Don't panic or feel disappointed if you cannot follow your budget completely. It takes time to change any behaviour, especially spending habits! You may have to adjust your budget as your needs and income change. The important thing is that you have a plan and that you are in control of your money.
