Personal Budgeting – How to do it!

Personal Budgeting – How to do it!

Budgeting

No one likes to prepare a budget and definitely no one likes to stick to a budget. However being able to create a budget and stick to a budget is a necessary tool for anyone who wants to run a business, be successful and it gives you the ability to create a nice financial future for yourself. Budgeting can also assist you in making wise choices.

Spreadsheet tools like Excel

The first thing to doing a budget is getting familiar with excel or any spreadsheet program. These programs are very simple and can be learnt in minutes. I was hesitant to use a spreadsheet program at first. I had no idea how it worked, then a friend told me that all you do is put in text and numbers and you can add formulas. That was literally all it took to get me started. I then learnt how to use formulas and the rest was history. Within a couple of days I was preparing advanced spreadsheets.

Basics of Budgeting

Look at where your monthly expenses are going. Take a couple of months and each time you spend something online or at a counter add that into your spreadsheet. I would divide the two expenses into necessary costs and optional costs. Necessary costs would include items such as rent, food, clothes (reasonable amount), electricity, gas, internet, etc. Then the next options would be Optional costs, these would include restaurants, movies, Starbuck’s coffees etc.

You also want to budget in your revenues, how much are you earning each month, after paying taxes, do you have other sources of income? Rental income, investment income, dividend income, or business income. Place those all in the monthly income column.

Next place your necessary expenses, as mentioned above.

Here is an example budget.

With this budget the goal would be saving $1,600 per month, which will all be deposited to your investment account on a monthly basis.

Your goal will be to save 50% of your revenue, however, to start, you can aim with saving 30% of your earnings which will then go into your investment account – See article “How to Become a Millionaire”.

As a minimum, you should aim to save about $1,000 per month in your twenties. If you are not saving this sum, you need to evaluate your revenue and your expenses. If you are earning less than $2,500 per month, this will make it very difficult to meet your goal. Aim to get a better paying job or look at earning a side income. We will cover this topic in an upcoming article.

If you are earning more than $2,500 but saving less than $1,000, you need to look at your expenses. Ideally, you should not be paying more than $750 in rent and $500 in food. If you are making over $5,000 per month, your goal should be to save $2,000 per month. Each dollar in excess of $5,000 per month revenue should be saved at a 75% rate. Hence, if you earn $10,000, you should save $2,000 plus 75% of ($10,000 – $5,000) or $3,750, hence a total of $5,750 should be saved per month. This will guarantee your financial future and ensure that at whatever level you are at, you are saving and you are well on your way to a stable financial future.

Some common sense issues

Always be frugal, this does not mean being cheap, it means being financially smart. As an example, if you are going to spend $5 on a cup of coffee, then don’t! If you do this every day, this simple cost will add $1,825 to your expenses annually. You are much better preparing the coffee at home and putting it into a thermos and keeping it with you through the day.

Do not go out to eat more than you can afford. Budget for this cost, can you afford this twice per week, once a week or once a month. Stick to what you can afford. Buy clothing that is at a low cost, look for sales and ensure that you are not spending too high. As well, make sure that you follow your budget. How much did you budget for clothes each month, try to stick to that.

Cars

By simply buying a second hand car that is one to three years old will save you a ton of cash in the long run. You can buy a used car that is still under warranty for a great price compared to the brand new model. As most studies suggest, you lose about 25% of the value of a brand new car on the ride home. If you purchased a $30,000 car, this trip just cost $7,500. This is a cost that can easily be avoided. There are some very reliable used cars that should be considered when looking into a car purchase. As part of your budget process, you should be including car costs, which include fuel, insurance and depreciation. If you cannot afford a car, then public transportation is a great alternative and will save money in the long run. Ask if a car is really necessary, sometimes it simply is but in some cases it is not. If you live in New York City, having a car may be an expensive burden that you only use from time to time.

Smoking

You simply must give up smoking, it is not healthy and it is expensive. This can save you thousands of dollars per year in the cost of cigarettes and hundreds of thousands of dollars in health care costs. As well, this can save your life. If you cannot quit find a help group that can assist with this.

Travel

Traveling is fine, but make sure it is budgeted for and does not come out of your savings.

Pay yourself First

Always pay yourself first, this is the monthly amount that should go to your savings/investment account. If you budgeted $1,000 per month here, ensure that you are maintaining this.

Investment Account

All of your savings should flow into your investment account. You should aim to invest in investment vehicles that can earn upwards of 8% per annum. A good example of this would be index funds, such as S&P 500 or Dow Jones.

Conclusions

It is never too late or too early to start budgeting. Spreadsheets are your friends, get to know them well and update them. By budgeting well, you will know what you can spend on and what you cannot. At the end of each month, you should be able to predict how much you can add to your investment account. If this amount is not achieved, you should know the reason for this and correct this in the following month.

By following these simple budgeting steps you will be able to ensure that you send enough savings to your investment account to guarantee a solid financial future.