Most people dream about things they want – luxurious vacations, mega mansions, cutting-edge gadgets, expensive cars – yet limited resources stop you get everything you want. You have to prioritize. That's where a personal budget comes in.
Starting a budget can help you plan and track all your income and expenses over a specific period of time to ensure you reach your financial goals and don't end up in debt or overspending. It helps you to have a better grip over your finances.
Having a personal budget is very important, especially if you have little money to face your expenses. While it could be fantastic to have the temptation of spending a few months of your salary on an epic gaming station, that could also be dangerous if you left without money and can't pay your mortgage, bills, or afford food. So let's learn what a personal budget is and how you can use it in your life.
What Is A Personal Budget?
A personal budget (also called a household budget) is a plan of what you will do with your income and keeps track of your expenses and financial goals. Personal budgets can help individuals spend less and save more to achieve some of their monetary objectives.
Most people choose a personal budget because they keep overspending their money on things they really don't need and want to pursue financial stability. But, of course, you need to avoid some of the most common budgeting mistakes like guessing their expenses, having unrealistic expectations, or choosing the wrong budget method.
Budgeting is all about being deliberate with spending, so you need to plan and stick with your budget. A personal budget will make you more confident in spending your money and eliminate anything you don't need (ordering food every day is unnecessary when you can save so much money cooking at home).
Who Are Personal Budgets For?
Personal budgets are for those who want to have better control over their finances. It doesn't matter how good or bad your financial situation is, how old or young you are, or if you have a better or worse job than anyone else.
A personal budget is ideal for you if you:
- Desire to achieve your financial goals
- Want to stop overspending money
- Wish to get out of debt
- Are not very good keep tracking your expenses
- Want to cut unnecessary expenses
- Have different monetary needs each upcoming period.
- Desire to build an emergency fund
- Wish to take control over your monetary life
Why Do You Need A Personal Budget?
Budgeting has many advantages and some disadvantages too, but the truth is there are many factors as to why you should consider budgeting. Instead, I will provide you with the four most crucial reasons why you need a personal budget.
A Personal Budget Gives Your Control Over Your Money
Budgeting will give you control over your money because you will know exactly how you spend it. When you do that, you can start managing your life better. In addition, a personal budget allows you to prioritize your spending, track where your money is going, and what changes you need to make. This is because a personal budget is all about your individual needs and no one else.
For example, without budgeting your money, do you know how much you spend on basic needs, how much money you save, or do you know the cost of going out every month? You are not even sure if you are spending beyond your means.
Having a personal budget will allow you to:
- Have an accurate view of your bills.
- Control how much money you are spending.
- Handle how much money you are saving.
- Control how much money you are investing.
- Have a plan for your money.
A Personal Budget Helps You Achieve Your Financial Goals
Having a personal budget without financial goals is a big mistake most budgeters make. You need to have specific motivations behind your budget, or you will fail to achieve what you proposed yourself. After all, spending money without a plan is never the best of ideas.
When you have financial goals in place, you know exactly how much money you need to save to create a savings account, start a new business, make a big purchase, buy something expensive, or create an emergency or a college fund. A personal budget will help you to understand how much money you can allocate to each financial goal every month.
A personal budget with financial goals can:
- Map out your monetary plans (save, invest, cut expenses).
- Maintain track of your money and goals.
- Push you to work toward your goals.
- Make you achieve your objectives.
A Personal Budget Stops You From Overspending
Budgeters often start budgeting because they want to save money or stop overspending. A personal budget will have a system in place where you know exactly how much money you have in and out, preventing you from overspending.
Most people get surprised that they are in debt or overdraft because they didn't think they spent too much money. Many individuals are on a tight budget, meaning they can only pay for rent, essential bills, groceries, and transport. So when they keep spending money on non-essential things, they end up in a complicated situation. In fact, most people don't even know they are overspending cash until it's too late.
A Personal Budget Helps You To Get Out Of Debt
People that don't budget tend to save less and get into debt more quickly. Therefore, having a personal budget is crucial in helping you avoid or get out of debt. If you budget your finances, you have a strategy for spending your money so you don't overspend and go into debt.
It's critical to grasp the difference between good and bad debt. The first one is anything that increases wealth directly or indirectly, like a mortgage, a student loan, or a business investment. The second one is anything that doesn't increase wealth, like purchasing things you don't need but want. For example, buying an expensive brand new TV on your credit card when you really don't need it.
Types Of Personal Budgets
When you decide to start a personal budget, it can be overwhelming to find out so many different types of budgeting. You need to make a plan on how to use your money, calculate your net income, track your expenses, set financial goals, and adjust your spending based on your strategy.
Let me show you some of the many methods of budgeting that can help you:
- 50/30/20 Rule Budget
- 60/30/10 Rule Budget
- Envelope Budget Method
- 70/20/10 Rule Budget
- Zero-Based Budgeting
- 50/40/10 Rule Budget
- Reverse Budget
- 30/30/30/10 Rule Budget
- Extreme Budgeting
- 60/40 Rule Budget
- 80/20 Rule Budget
- Digital Envelope System
What Personal Budget Is The Best For You?
A personal budget is all about being thoughtful and deliberate with spending your money and planning ahead to ensure you reach your financial goals and expectations. So choosing the best personal budgeting method is essential for your success. You can also check how to start a family budget if you have more people to budget it.
You need to answer a few questions to ensure you choose the perfect budgeting type. Then based on your answers, you can check what personal budget type is the best for your needs. Here are the questions:
- Why do you want a budget? To save money, pay a debt, go on holidays, or any other reason?
- What is your current financial situation? With huge debt, overspending every month, a stable situation, or a saving account with money?
- What are your financial goals? Some budget methods are more direct to save money, and others to spend less.
- How long will it take you to accomplish your financial goals? Some budget types let you reach financial goals more quickly.
- How much effort will you devote to your budget? Some budgets are less time-consuming than others.
How To Start A Personal Budget?
As I said before, starting a personal budget can be overwhelming if it's your first time budgeting your finances or if you keep failing because you are unsure what to do. To make your life easier, I have put a simple guide of 13 steps on how to start a personal budget, which you can read in more detail here.
1 – Determine Why You Want A Budget
First, you need to understand why you want to start budgeting your money. It's because you want to save money, stop overspending, pay a debt, achieve a financial goal, have control over your money, etc. Remember that determining why you want a budget is your motivation to start one and not the reason why you will keep doing it.
2 – Gather Your Financial Paperwork
You need access to all your financial documents to create a budget that works and allows you to follow it without any significant problems. A simple budget template, bank statements, credit card bills, cash payment receipts, etc.
3 – Add Up All Your Income
Add all your income to ensure you know how much money you have available next month. Examples of income: salary, business income, commissions, money gifts, etc.
4 – Add Up All Your Expenses
Check all your financial paperwork and add your expenses to the simple budget template to know where your money is currently going. Some costs you should include in your budget are rent, utility bills, groceries, transportation, insurance, loans, holidays, shopping, eating out, etc.
5 – Determine Your Financial Goals
Set realistic financial goals to keep you motivated during the month and stick with your planned budget. Some examples of financial goals are purchasing a house, paying debt, investing your money, building good credit, saving for retirement, holidays, buying a new car, etc.
6 – Learn About Different Budgeting Methods
You should know by now the different types of personal budgets you can use and which are the most suitable for your financial goals and needs.
7 – Pick A Budgeting Method
After you have learned the different types of budgets you can implement, it's time to choose one and stick with it to see if it works.
8 – Choose The Right Budget Tool
Choose the best tool according to what you think will be the best. Some people prefer budgeting excel spreadsheets, other budgeting apps, and some others printables and write it by hand. Learn how to make a budget in Excel.
9 – Implement The Chosen Budgeting Method
This is the part where you take action and implement the budget you think is the most suitable to your needs and the budgeting tool you think will be the best to keep track of your spending.
10 – Keep Track Of Your Budget
Keep an eye on your budget and check daily, weekly, or every two weeks to ensure your expenses are equal to or lower than your monthly income.
11 – Evaluate Your Budget Monthly
After one month of implementing your budget, you can check what went right and wrong. It's fundamental that you make some adjustments and keep trying till you get it right. Don't be afraid of trying a different budgeting method.
12 – Readjust Your Budget If Necessary
Keep evaluating your budget monthly till you find the right way to achieve what you want. Keep in mind that life changes from time to time, so you also have to adapt and make changes to your budget to ensure you accomplish what you have proposed.
13 – Try Budgeting Again
After you have made some modifications to your budget, you try it again next month.
Personal Budget Examples
Examples make everything clearer, including personal budgets.
Here we will look at examples of three different budgeting methods: a percentage method, extreme budgeting, and a zero-based method.
All these different types of budgeting will give you an idea of how to budget your money.
50/30/20 Rule Budget
Like any budget method, the 50/30/20 is based on percentages and focuses on three different categories:
- Needs – You will spend 50% on your basic needs like bills, groceries, rent, and transportation.
- Wants – You will spend 30% of your budget to pay for things you want that are considered non-essential expenses, like Netflix or gym membership.
- Savings – You will save 20% of your salary to build your savings, pay off debt or invest the money.
The extreme budgeting method is not based on percentages and focuses on two steps:
- List Your Expenses – You will list every single expense you have. List all the fixed and variable costs and any item you have spent money on in the last three months.
- Eliminate The Non-essential – Cut any expense that is not necessary for you to survive, like entertainment subscriptions, eating out, going to the cinema, buying clothes, holidays, etc. Keep your needs and cut your wants.
The zero-based budgeting is a method where you give a purpose to every dollar and penny you earn and spend.
With zero-based budgeting, you allocate all of your money to expenses, savings, debt payments, investments, or any other category you could think of. The goal of this budgeting method is that your income minus your expenses equals zero by the end of each month.
Common Questions About What Is A Personal Budget
These are the most common questions about what is a personal budget.
What Are The Main Purposes Of A Personal Budget?
The primary purpose of a personal budget is to create a plan to help you create financial stability, making you save money, stop overspending, get out of debt and achieve your financial goals.
How Do You Write A Personal Budget?
To write a personal budget, you need to determine why you want a budget, gather all the financial documents you need, add up all your income and expenses, decide on your financial goals, learn about different budgeting methods and pick one. Then, you use the right budget tools, implement the chosen budgeting method, keep track of the budget, evaluate it, readjust it, and try it again.
What Are The Three Critical Elements Of Creating A Personal Budget?
The three critical elements of creating a personal budget are having financial goals, breaking down your expenses, and choosing the best budgeting method according to your needs.
What Should Be Included In A Budget?
In a personal budget, you should include all your income (salary, commissions, gifts, cash, money from investments, etc.) and all your expenses (mortgage, essential bills, groceries, eating out, shopping, dates, etc.) You should also have your savings, investments, debt payments, etc.
Budgeting is not easy, and no budget is a one size fits all solution. So what is a personal budget? It's a way to dig inside your finances and check where you are spending your money and how you can manage it better.
The key to a successful personal budget is prioritizing what's important to avoid overspending and debt. With time and experience, your budgeting skills will improve, and making a monthly budget plan that will work will become easier.
Michael launched Wealth of Geeks to make personal finance fun. He has worked in personal finance for over 20 years, helping families reduce taxes, increase their income, and save for retirement. Michael is passionate about personal finance, side hustles, and all things geeky.