A personal or home budget is a tool that helps to allocate funds to different areas of your life. It is part of good financial planning. Financial planning is necessary to make sure that you cover all your expenses every month and that you save enough money for emergencies, retirement, and other financial goals. So, today we want to look at budgeting a bit closer.
What is a budget?
A budget is a detailed summary of your monthly income and expenses. It shows what your salary is and any other forms of income. It shows what you pay towards groceries, car payments, insurance, etc. It also shows your debt and the payments due for paying that back. Lastly, it indicates your savings and where they are going. When you have all this information in one place it is easy to plan ahead and see if you need to make changes to your spending.
Why do you need a budget?
A budget helps you keep track of your finances. It shows you what is available and what is being used It also shows you whether you are reaching your goals with regards to saving and paying off debt. When you look at your budget, you can see where you are maybe spending too much and you can make adjustments accordingly. It is basically a tool or system to help you manage your finances.
What tools can help you with budgeting?
You will find a wide range of software programs that will generate a template for you or even a whole budget and it will do the math for you as well. You can also just use good old-fashioned pen and paper if you prefer. The tools help to set up your budget more correctly and it can indicate problem areas you may not otherwise notice.
How much should you allocate your funds?
Each person will do what they feel is right and suit their lifestyle. Everyone approaches money and the spending thereof in their own way. A famous finance expert once set out a formula for allocation of funds. It is called ‘The60% Solution’. Basically what it comes down to is that 60% of your monthly income must be allocated to expenses that are standard like insurance, food, etc. The remaining 40% is divided between retirement savings, other savings, spending money or entertainment money, and emergency funds.
How often should you re-evaluate the budget?
You should re-evaluate your budget at least every six months if you didn’t experience any major changes. Changes like job loss, promotion, new pets, a new baby, emergency medical expenses, a break-in, car trouble, etc. will require an adjustment of your budget. So, you should re-evaluate as often as you see fit but at least once every six months.
When you have to draw up a budget the first time it will take time and patience. However, once it is done it becomes a lot easier to manage your finances and make adjustments. It is even easier if you use software or online tools to do the work for you.