How to create a personal budget?

Managing your finances is very important if you don’t want to end up in a financial mess noted by Bahaa Abdul Hussein. The key to managing finances is creating a budget. A personal budget is a financial plan that tells you how much money you earn, and how much you can spend. Let’s look at how you can create a personal budget.

Creating a personal budget 

A personal budget ensures you manage your money effectively, avoid overspending, and try to be out of debt. Here are the steps that explain how to create a personal budget:

1) Estimate your incomes

The first step in making a personal budget is to list out all your incomes. Estimate all the income you will get. It includes income through employment, business income, and passive income (savings, rent, royalty, etc.).

Once you work out all the income, include it in the budget for the period for which the budget is being made (usually a year, but can also be for 3/6 months).

2) List out all your expenses

The next step is to list out all your expenses. There are two categories here – needs and wants. Needs are the essentials for which you must spend. They include groceries, clothes, electricity bills, mobile, internet, etc. They also include the interest you need to pay on any loan/mortgage you have taken.

Wants are those that are desirable but not essential. For instance, a weekend outing or an annual vacation. Movie night outs, cable TV subscription, buying new furniture, and upgrading your car are all wants. Depending on your financial position, you can budget for wants. If your income is lesser than your expense or not sufficient enough, then you must cut down on wants.

3) Plan your savings

Every month you must save money for the future. Ideally you must spend 40% of what you earn on needs, 30% on wants, and save the balance 30%. The money saved must be wisely invested so you earn from it through interest, dividends, etc. Savings is the money you accumulate for the future.

4) Track the budget

Once the budget is ready, track it regularly. It is not enough making a budget. You must track it. Keep a track of whether you are getting all the income as planned. Most importantly, track your expenses to ensure you don’t spend more than what’s planned.

5) Follow it faithfully 

Once your budget is ready, follow it faithfully. Following the budget ensures financial discipline and will help you lead a comfortable and stress-free life.

The article has been written by Bahaa Abdul Hussein and has been published by the editorial board of www.fintekdiary.com

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