Personal Budget: Step by step to create an effective one

A personal budget is a plan for managing your income and expenses to align spending with your financial goals. Budgeting is a critical skill that allows you to take control of your money, reduce unnecessary costs, save more each month, and pursue your financial objectives in a systematic manner. Developing a realistic budget along with discipline in its implementation can be transformative for your finances. Here is a step-by-step guide to creating an effective personal or household budget tailored to your situation.
What is a Financial Budget?
A financial budget is a tool for allocating your income towards expenses, savings, and financial goals over a defined time period. It lets you plan your spending relative to your earnings so you can minimize excess expenses, have funds available for essentials and savings, and achieve monetary targets. The most common budgeting period is monthly.
Why is a Financial Budget Important?
It is important for everyone to stick to a budget. If you are not convinced, let’s take a look at some of the most important reasons on why you need to stick to a budget.
- Enables aligning expenses with income and avoiding overspending
- Helps plan for irregular expenses
- Makes you conscious of unnecessary discretionary costs that can be reduced
- Allows setting aside funds for goals like debt repayment or retirement
- Assists in quick adjustments if income decreases or expenses rise
- Provides visibility into exactly where your money goes each month
- Helps improve cash flow by highlighting areas for savings
How to Create an Effective Budget
Now you are aware about the importance of sticking to a budget. Along with that, you should be aware of the steps to create an effective budget. Here are the steps for it.
- Document your monthly net income after taxes. Include all sources of earnings.
- List all your fixed expenses like housing, utilities, loan payments, insurance etc.
- Identify variable expenses for essentials like food, fuel, medical, transport etc. Use past spending to estimate.
- Add discretionary expenses for lifestyle, entertainment, clothing etc. Distinguish between needs and wants.
- Factor in savings contributions, financial goals, and any other payment obligations.
- Use a spreadsheet to assign estimated amounts to each expense category and add up the totals.
- Adjust variable expenses to create a realistic balanced budget within your net monthly income.
- Refine the budget over time as you track actual spending. Make revisions as income or costs change.
Budgeting Strategies to Save Money
Creating a budget just for the sake of it will not be able to help you with saving money. There are few strategies that you need to follow in order to save money. They include:
- Review subscriptions and memberships – Cancel any unused/unnecessary ones
- Cut back on eating out – Cook more meals at home
- Downgrade internet or mobile plans based on usage and needs
- Use discounts, cashback, and loyalty programs to reduce costs
- Negotiate better rates for insurance policies when renewing
- Avoid impulse purchases and shop with a list to curb unnecessary spending
- Buy second-hand, discounted, or generic versions of items
- Spend time on affordable hobbies and entertainment
- Look for cheaper alternatives for any high expenses
- Maintain separate budget for fixed long-term goals like debt repayment
Find ways to save on variable expenses that align with your lifestyle and priorities to create some breathing room in your monthly budget. The extra savings can be directed towards reducing debt, building an emergency fund, or other financial objectives faster.
Family Budget: Tips and Examples
If you are still confused on how to create an effective budget, you may consider the following sample budget list.
- Review expenses jointly and have buy-in from all adults on the budget.
- Discuss with older children and assign them limited budgets for their discretionary spending.
- Agree on a reasonable allocation for family entertainment, dining out, recreation etc.
- Set limits for individual personal care expenses for each family member.
- Factor in expenses for children like tuition, activities, clothing etc.
- Maintain some flexibility for unexpected health expenditures.
- Have a fixed allocation for yearly expenses like vacations, gifts, repairs etc. and build up monthly contributions.
- Assign clear responsibility for payment of bills – housing, utilities, insurance etc.
- Consider tools like spreadsheets, budgeting software, or apps to simplify managing the family budget.
Maintaining a budget as a family unit helps align all members towards shared financial priorities and goals, avoiding conflicts over money.
Monthly Budget vs. Annual Budget: Which is Better?
Both monthly and annual budgets have certain advantages:
Monthly Budget
- More manageable on a regular basis rather than planning a whole year together
- Allows flexibility to adjust allocations each month based on needs and expenses in that period
- Ensures expenses don’t exceed income in any given month
- Helps curb impulse spending in a particular month by having a pre-defined budget
- Simpler to initially implement for those new to budgeting
- Provides opportunity every month to analyze expenses and fine tune budget
Annual Budget
- Ensures savings for large annual expenses that exceed monthly income like insurance premiums, vacations etc.
- Identifies all key expenses and outflows needed for entire year at once
- Prevents underspending or overspending in particular months due to lack of visibility into annual requirements
- Useful for allocating funds needed for specific annual financial goals like debt repayment
- Helps prevent situations where you overspend too much in early months leaving insufficient for later months
- Gives complete picture of cash flow needs for the year for complex financial planning
For most individuals and families, it is recommended to start with a monthly budget to establish discipline, then create a higher level annual budget to account for irregular annual expenses and work towards long term objectives.
Software and Apps for Budgeting in the Philippines
Here are some recommended budgeting tools and apps available in the Philippines:
- Money Lover – Mobile app to track expenses across categories including charts and analytics. Has free and paid versions.
- Pocket Guard – Imports data to auto-categorize spending. Can sync with bank accounts. Free version available.
- You Need a Budget (YNAB) – Award winning budgeting system. This app is available free for students. Others will need to buy the subscription.
- Mint – Tracks transactions, sets budget limits, provides free credit monitoring.
- Wally – Simple app to capture expenses, manage budgets. Free version with paid upgrade.
- Squirrel – Enables joint family budgeting and expense tracking. Has free and premium offerings.
- Microsoft Excel – Allows building customized budgets and tracking using spreadsheet software.
- Google Sheets – Freely available spreadsheet solution to build financial plans.
- Quarke – Local Filipino personal finance app with budget features. Free with option to upgrade.
- Money Manager – Manage budgets, transactions, accounts in this app. Free with paid enhancements.
Look for apps that suit your budgeting needs and integrate with your bank accounts for automated syncing of transactions to simplify the process. Consistently using a structured tool makes budgeting easier and more effective.
Final words
Creating a household or personal budget need not be complicated. Start by identifying your income, listing your required expenses, and assigning estimated amounts to each. Look for ways to increase cash flow that align with your lifestyle. Revisit the budget periodically and adjust based on changing circumstances. Consistently following your budget is key to gaining control over your finances.