What Is a Personal Budget And Why Should You Have One?
Money, it may not make the world go around but it certainly pays for virtually everything on it and learning how to manage your finances is a life lesson that everyone, regardless of their income, needs to learn. So how can you take better care of yours?
What is budgeting?
The key to successful money management is budgeting. But what is budgeting you may wonder? Well, budgeting is very simply the process of planning how you intend to spend your money to ensure that you have enough to do all of the things you want to do without spending beyond your means and getting into financial turmoil. Budgeting is also a valuable tool for those who need to get out of debt or are saving for an expensive life event such as a wedding, the formation of a new business or a large purchase, as it can help you to see where you tend to spend a lot of your money enabling you to assess where you can make cutbacks and put aside money towards your savings goal.
What are the benefits of budgeting?
Despite budgeting, being is a valuable and effective tool for money management many people avoid it because it not only involves confronting your finances, a task which some people prefer to stay in the dark with, but it also takes a little extra work. If you’re one of the people who needs a little more convincing then here are a few of the key benefits of budgeting your money.
1. It increases your financial awareness
Ever opened your bank account and thought, ‘where has my money gone?’ or worse have you ever had your card unexpectedly declined at the checkout when you thought you had sufficient funds to cover the purchase? This is usually the result of poor financial awareness, or simply put, burying your head in the sand with regards to your personal finances. People bury their heads in the sand for many reasons but the most common two are because they don’t want to see their financial situation or they can’t be bothered to. Financial awareness is the key to avoiding embarrassing moments at the checkout and frightening bank account checks. Begin budgeting to see what money comes in, where it goes out and what you spend it on.
2. It helps you to save
Unless you have a huge income which you physically can’t spend each month then the chances are that budgeting will need to form a big part of your tool kit for hitting your savings goal. Budgeting lets you plan ways to make savings and will encourage you to put regular money aside.
3. It gives you peace of mind
Knowing in advance that you can cover all of your necessary expenses and bills for the month can help to give you better peace of mind and reduce your stresses around money.
4. It can stop money problems from creeping up on you
Money problems and debt can often creep up on people, starting with a little overdraft here, a loan there, a credit card to cover a big purchase and scary interest rates which slowly increase your debt without you even realising it. Budgeting enables you to see your finances clearly and can help you to see money problems in their early stages so that you can then plan to avoid them.
Budgeting can help you if you need to take out a debt
Debt isn’t necessarily a bad thing if you know you can afford it. Debts such as purchasing a holiday on a credit card or buying a car using finance are commonplace and can help to spread the cost of these big payments over time. Budgeting helps you to understand if this debt is something you can afford and by understanding the interest rates and how much the repayments will impact your overall spending budget you can better decide if it is a payment you are willing to make.
How to get started with budgeting
If you’re now convinced that budgeting is something that could help you then you may now be wondering how to get started. There are a number of ways to keep a personal budget including on paper and using online applications and software, if you’d be interested in budgeting online then this is an interesting article to read – https://setapp.com/lifestyle/the-best-personal-finance-apps-for-mac
Regardless of how you choose to budget there will be some information that you need:
1. What is your income
If you have a sole income such as a regular paycheck then this may be as simple as checking your last payslip, but if your income varies due to shift work or working freelance then you will want to try and work out what money you have to work with for the month ahead. To do this try to calculate invoices you expect to be paid or total up the number of hours you expect to work. If it really is impossible to work out an exact figure then try to come up with an average.
2. What are your regular outgoings
The next step is to work out your regular outgoings. This includes things such as rent, bills, direct debits etc and the easiest way to do this is by looking at your bank statement or an online banking App and finding regular transactions.
3. Do you have any one-off expenses this month?
When making a budget for the month ahead it’s also important to think about whether you have any one-off expenses coming up such as your car MOT or someone’s birthday who you know you need to buy a gift for.
4. Have you accounted for other life expenses?
Don’t forget to also budget for other life expenses such as food, fuel for your car and transport costs for work. These may not always be regular but they’re also not a one-off so give them their own category and check them regularly.
5. Are you in a deficit?
Having worked out your income and outgoings you should now be able to see if your budget leaves you in a deficit, i.e spending more than you have coming in. If this is the case then you will need to find ways to cut back your spending. If your budget is showing that you have money left over then now is the time to consider whether you want to start saving and how much of that leftover money you want to allocate to this.
6. Review your budget regularly
Having made a budget and reviewed your outgoings now is the time to stick to it to hit your savings goals. Remember to also review your budget regularly especially if your income or expenses change.