A Beginners Guide to Creating a Personal Budget

Budgeting is tough. The vast majority of people don’t even know where to begin when it comes to creating a budget. Of those that do, plenty fail due to unrealistic expectations or a lack of discipline.

In order to achieve financial independence, good budgeting skills are absolutely essential. There is no easy way around the issue. Without a sensible method of controlling your cash flow, you will always be suffering from debt and poor money management.

It doesn’t matter what your income level is. We’ve all heard the stories of A-list celebrities and basketball players blowing their fortunes due to bad advice and terrible budgeting. The idea of a budget is to ensure that your lifestyle is within your means, and this applies at any income level.

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The vast majority of people who do up a genuine, honest budget quickly notice the same thing – there are very easy, painless ways to save money. Simply creating a budget can lead to better money management. True success comes from sticking to the budget, and continuously refining it to ensure that you live a comfortable life while also keeping as much of your paycheck in your back pocket as possible.

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There are many ways to go about creating a budget. You can use complicated online tools, a simple excel spreadsheet, or a scribbled mud map on an old napkin. At the end of the day, it’s up to you what you choose to use. Just keep in mind that you want to be able to commit to this budget for a long period, and it has to be easy to understand and adapt to changing circumstances.

Below, we’ve outlined a list of tips on how to create a personal budget for beginners.

1. Calculate your monthly income.

Most budgets are done on a monthly basis. This makes it easy, because so many outgoing payments are made monthly. Make sure you list all of your income. If you have a side job, or pick up some extra cash from odd jobs like gardening or freelance contracts, it’s good to include this money too. Remember, you want the most accurate budget possible in order to get the most out of it. It helps to improve discipline and saving potential if every incoming dollar is accounted for.

If you want to take things a step further – include the tax that’s coming out of your income as a separate calculation. Come tax time, you can line up expenses that could be tax deductible with the tax you paid, and aim for a 100% refund (always coveted, rarely achieved).

2. Calculate your fixed monthly expenses.

These are the outgoings that you can easily predict. This includes rent, phone and internet bills and estimates for grocery and utility bills. A consequence of budgeting is that you can no longer pick up whatever you want at the grocery store – choices and sacrifices must be made to ensure your spending hovers around the same amount each month. Predictability and commitment are key to budgetary success.

Most people get their expenses wrong on the first month. It’s easy to overlook something, or forget a monthly payment, in the mess of a bank statement. Always tinker your budget, and compare your first month’s effort with your bank statement to make sure you’ve picked up everything.

3. Set Goals.

This is critical to successful budgeting and saving. Without concrete goals, you’ve got nothing to aim for. Want to buy a house in a decade, or go on a holiday at the end of the year? It’s important to record these goals and the cost of them, so that you can see a chunk taken out of the cost every month and watch your steady progress. This can be very rewarding, especially considering the hard work and discipline required to maintain a budget.

You should have both short and long term goals. They should be reasonably sensible; the best goals are those that place you into an even better financial position, such as opening a stock portfolio, investing in a hedge fund, or putting a deposit down on a house.

4. Determine discretionary expenses.

Discretionary expenses are a black hole for money. These are the things you buy each month that you don’t really need to. They can include things like take-out, trips to the cinema, or alcohol. The quickest and easiest way to make a lean budget is to trim out all your discretionary expenses.

However, cutting all the fun things out of life is a fast path to budgetary failure. If you can’t reward yourself, and enjoy the occasional treat, you will quickly fail at maintaining discipline in your budget. The key is to pick things that are highly rewarding, but also very cheap. This varies from person to person.

When looking over your discretionary expenses, consider alternatives. Instead of a restaurant dinner and a night at the cinema, why not cook something fancy and rent a movie at home, or just go for a walk through the city or night district? There are always cheap alternatives to expensive activities.

5. Do the math.

Subtract your income from your expenses. If it’s a positive number, you’re doing well – this means that you’re close to living within your means. If it’s a negative number, you really need to tighten the belt to avoid racking up more credit card debt or putting a bigger dent into the savings account.

Once you’ve determined how much you have left over each month, you can start looking at your options of what to do with it. Depending on the amount, you can place it into a savings account until you’ve built up a solid emergency buffer, or you could make regular contributions to an index fund or micro-investment service.

6. Implement, Monitor and Adjust.

This is the critical stage to next-level budget success. If you’ve gone through the hard yards of developing and implementing your budget, then you owe it to yourself to make the most of it. Always be monitoring the budget, and always be prepared to adjust it. You can gradually tighten the belt month on month without noticing a significant hit to your lifestyle. This is how really smart budgeters afford their homes earlier than the rest of us. They set a goal five years out, and gradually find ways to spend less and less money each month until they’re hanging onto the majority of their paycheck and pumping it into their savings account.

Budgetary success comes down to discipline. If you have discipline, you can say “no” to unnecessary expenses. Set goals, and reward yourself every time you make a significant step towards them. Remember, it’s your money, and it’s up to you to keep it.

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