How to Create a Personal Budget
Where You Are
Square one in the personal budget process is learning where you are financially. Start by determining your net worth. Use a personal finance software system to record your assets: the current values of your home, car, investments, bank accounts and retirement accounts. Record your liabilities, too: what you owe on your mortgage, car loan, credit cards, and student loans. If your total assets exceed your total liabilities, you have a positive net worth. If your liabilities exceed your assets you have a negative net worth.
What You've Got
The next step in the personal budgetary process is discovering what you have to work with. Financial pros refer to this as your personal cash flow. You can determine your personal cash flow by comparing your total monthly income to your total monthly expenses. Your monthly income includes any money you receive from any source - wages, tips, investment income. Your expenses is all the money that you are obligated to pay out to someone each month, such as rent or mortgage, utilities, insurance, car payments, student loans and credit card bills, plus your living expenses, such as food, clothing, gas and entertainment. If you make more than you spend, you have a positive cash flow. If you regularly send more than you make, you have negative cash flow, which means you're either drawing on your net worth or borrowing against future earnings to make ends meet.
Where You Want to Go
Before you can plot a course to take you from point A to point B, you must first know where point A and point B are. Point A is your starting point and point B is your financial goal. Your net worth and cash flow information tell you where your financial point A is, but point B is a bit more nebulous. It's different for every person, and it changes with your situation. Point B could be your ultimate personal financial destination, or it could be the first of many stopping points along the way. You have to decide what that is. Point B could be getting out of debt, building a secure retirement fund or creating a financial empire. It doesn't matter what your point B is, as long as you know what it is.
How to Get There
Your personal budget is the road map that allows you to get from point A to point B, financially speaking. "A budget is nothing more than a document that details how you spend your money," says Mark Noel, Certified Public Accountant. "Determine the period of time your budget will cover. Monthly is a good option for many people.” Use your personal finance software system to budget your expenses. Start with your monthly take-home income, then enter the amount of all of your monthly expenses, starting with the most important down to the least important. Each expense will reduce the amount you have available until you have either exhausted your money or your list.
Bumps in the Road
If you have money left over after paying all of your expenses, you have the option of saving, investing or paying additional on the principal amount of your debts. If you run out of money before you run out of bills, you'll need to make some adjustments. You might need to identify and cut back on some of your non-essentials. For example, consider taking your lunch to work a few times each week rather than eating out every day. You might need to sell that expensive car and buy a more economical model, or cut back on the cable service. "By having a working budget in place, you'll have a better idea of where your money comes from and where it goes, so you can make an informed decision about how to budget it," Noel says.