Personal Budget

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A personal budget is a roadmap to spending money and achieving financial goals. Many people look at budgets as something to create after you’ve done something bad, like getting into credit card debt. But, it’s smart to know where and how you’re spending your hard-earned cash ahead of time.

Think Ahead

You want the hottest mp3 player, some new tunes to go with it, designer jeans, a few extra ring tones for your cell, and a weekend out with friends.

Can you afford all this right now? Probably not. But, if you plan a personal budget to allow for certain types of spending, you’ll get more than you thought you could, and not owe any money afterward.

If you rely on credit to get what you want, there’s no end to what you think you can buy. However, instead of enjoying what you bought, you’ll be working longer to pay for it all.

As desirable as instant gratification may seem, it's not the way to go. Many money experts agree that by setting aside the funds for something you really want, you’ll actually enjoy it more when you eventually get it. The anticipation is a reward all by itself.

The key is to spend less than you make. In time, as you accumulate savings, you’ll have plenty of extra money.

Pay Yourself First

No matter how much money you make, it’s important to pay yourself first by putting money into savings. You don’t want to get into the habit of living paycheck to paycheck, because you’ll never reach your financial goals or buy the things you want that way.

When you set up your personal budget, add in a percentage of income that will be marked for savings. The average amount is 10 percent, but many people try to save more than that.

Remember this: if you save now, you make more money later. Look at the numbers to see why this is important:

: $500 income a month – 10 percent savings = $50 a month into savings; $50 x 12 months = $600; $600 x 5 percent interest = $630 saved for the year

: $1,200 income a month – 10 percent savings = $120 a month into savings; $120 x 12 months = $1,440; $1,440 x 5 percent interest = $1,512 saved for the year

Saving in advance helps you get paid even more. Buying on credit will never do that.

If you work at a job that offers direct deposit into a savings account each pay period, sign up for that option. If you don’t see it, you won’t spend it, and it will earn money more quickly than if you wait to get paid and then make the deposit yourself.

Young Money is a terrific site that focuses on concerns many young people have finishing school, getting through college, and launching new careers. Check it out for more money saving tips.

Creating a Personal Budget

Work from the Facts

To create a personal budget or spending plan, start with the facts:

Income
Set expenses (include savings in this)
Variable expenses
Goals

Experts suggest that keeping track of things monthly is an efficient way to see your personal budget in action.

Spend Only What You Need To

Do you need a $3.50 latte every day, or could you save an extra $10 a week by only having it two days a week? It’s important to have a spending plan in place for variable expenses like this. That’s the money pot to draw from when you want something extra, instead of your savings.

An extra $40 a month saved on fancy coffee is a night out, a new pair of jeans, or a third of a 20G iPod.

Keep Track of It All

Make sure to keep all receipts, so you can really determine variable expenses and see where your money goes. More than 20 percent of people never check a price or a receipt. If they were overcharged, they don’t know it. Log all receipts, no matter how small, into the appropriate category so you can continually modify your personal budget with facts.

Keep It Organized

Identity theft is a serious issue. Don’t leave receipts in shopping bags, in the ashtray of your car, or floating about a purse or backpack. Carry a notebook to put receipts in and log them, or put them in a wallet until you can record them later.

If You Use Credit, Spend Wisely

Finally, if you have a credit card, remember that money is the furthest from free. The bank is loaning you money to buy something, and you have to pay it back, often with interest. That’s the bottom line.

Ask yourself: how much of your money should they have? If the answer is “none”, you’re on the right track. If you borrow only what you can afford to immediately pay back, without interest, then you win.

So use credit carefully. Find a credit card that helps you set limits. Keep it primarily for emergencies or to help track expenses outlined within your personal budget. It’s important for future money management to establish a credit history, but you can do that without getting in over your head.

Example of A Personal Budget

Let’s look at Lucy. Lucy is a junior in college. She belongs to a sorority and pays monthly dues to the house. Her involvement with the sorority adds to her social life through trips, formals, and other events. Her car was a gift from her parents, but she pays for car insurance, gas, and upkeep. Tuition is paid for through grants and some scholarship money, but she has to purchase books and other tutorials each semester. She works as a barista at a local coffee shop some afternoons and in a clothing consignment shop on weekends.

Income:

: $597 a month, after taxes

Set Monthly Expenses:

: Savings: $60; Sorority Dues: $55; Car Insurance: $75; Gas and Upkeep: $65; Cell Phone: $30

: Monthly funds remaining: $312

Variable Monthly Expenses:

: Entertainment: $100; Eating out: $50; Clothing: $50 (her discount at the clothing store helps with this)

: Monthly funds remaining: $112

Goals:

: Semester Books: Used, $250 each semester; Sorority Functions: $300-$400 each semester

: Funds needed for goals each semester: $650 x 2 = $1,300; Total remaining in spending plan at the end of the month: $112 x 12 = $1,344

On this kind of personal budget and spending plan, Lucy has more than enough remaining each month to plan to cover the costs of books and the fun activities through her sorority. She leaves her savings intact. So if she wants to upgrade her mp3 player, she can tighten up her entertainment budget for a month or so and then pay cash for it.

Remember, It’s Your Money

Creating a personal budget, shopping with coupons, and tracking your actual spending is smart money management. You will reap more benefits from this practice than you can even imagine.