How To Create a Personal Budget (and Build Your Financial Fortress)

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Some might think that achieving financial security requires getting personalized expert advice or having a professional money manager like some wealthy people do. But getting control over your personal finances and creating a financial plan for the future is something everyone can do.

Long Escalator Up

It is also something everyone should do, regardless of how much money you have today. The truth is that the best practices of financial planning are ultimately quite simple. The foundation on which financial security is built is a household budget. And, at the most basic level, successful budgeting involves two simple steps: controlling spending and growing income.

What You Measure You Can Control

Before one can control any of these variables they must list out the details related to each. This means, on the income side, being clear on how much money is coming into the home. If a couple is living together and working jointly then both incomes should be considered. It’s important to also note two other factors. The first is when this pay comes in each week or month, and the other is whether required taxes are already being withheld from the pay.

On the spending side, things can get a bit more complicated but it doesn’t have to be overwhelming. Start with the basics of listing housing costs (rent or mortgage), utilities, insurance, food and household essentials costs, and other recurring costs like school, childcare, or medical costs. Taken together, these are expenses.

The other important thing to list here is any debts such as credit cards or other loans. These are called liabilities. There is much written about the risks of credit (especially credit cards) but we will not go into that here. However, when setting a budget these things must be carefully documented.

So, both expenses and liabilities should be listed on one side of the “ledger” and tracked alongside income on the other side. So, if income minus expenses and liabilities is a positive number (money left over after paying monthly costs) then this is a balanced budget.

Budgeting Tips and Tricks

You can create and track your budget on a single, hand-written sheet of paper. But it may be easier to do ongoing updates if you use a spreadsheet such as Google Sheets or Excel. There are also various free apps that can help with your ongoing budgeting but, again, simple is best!

When listing out expenses it is important to be as detailed as possible. When estimating, round up to the next largest number in order to be conservative. As you list your different expenses it’s also useful to mark them as either essential or optional. You might spend $40 per month on coffee and $50 to pay the electric bill. Obviously, the electric bill needs to be paid; buying the fancy mocha latte is a luxury you can live without.

Dealing with those nasty credit card bills and loan payments in a timely fashion is very important. And there are many strategies for how you can get high interest debt under control, but it is a whole other discussion. For your fast and friendly budget process just include your minimum monthly payment due.

Finally, the note above regarding your tax withholding is an important one. If your paycheck does not already withhold taxes then you may have to pay your own (usually estimated quarterly). If so, make sure to include a line item in your budget and put that money aside (because the tax man doesn’t like to wait!).

The Balancing Act

The most important thing about budgeting is actually balancing your budget. Remember to list out everything, including essential and optional expenses and debt payments. If you subtract those totals from your income and you get a negative number (more costs than earnings each month) don’t get depressed or discouraged from the budget process. Listing costs and income is just the first step, and now that you can see everything you can start to take control.

Start reducing those optional expenses first. As you go about your day you will start to remember the budget itself and become more aware of your spending habits. This helps resist new purchases of non-essential things.

Paying down or off higher interest credit card balances is an essential longer term step, but an easy first step can be to consolidate debts into fewer open balances. This helps reduce the number of minimum payments and make your expenses that much easier to control.

Reduce and Expand

Finally, a balanced budget isn’t only about reducing expenses but also about increasing earnings and income. Many people already have part time or second jobs by necessity. But it is also possible to do a “side hustle” and generate more money, adding income to the budget.

You may also own things already that have value but go unused, in which case you can consider selling these things to use the money in other ways. Any high-value items should be considered assets and, like any asset, it should be counted as part of your personal balance sheet.

When you have balanced your budget and you become “cash flow positive” you can take things to the next level. Once income permits, you can add additional items to your “expense” list, including a certain $ amount to your emergency fund and another amount to your investment or retirement account. These topics will be discussed further in another article, but the idea is to treat these savings and investment allocations as essential parts of your budget (or at least more important than the fancy coffee).

Your Future Financial Fortress

So, building and managing your budget can be very simple but, when done right and regularly, it is a powerful tool and essential to securing one’s financial future. The ultimate goal each month is that one’s income or earnings is greater than total expenses, and that those “expenses” eventually include saving and investing for the future. In this way, the household budget becomes a strong foundation on which you will build your financial fortress.

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