What is a Personal Budget and How to Make One (2024)

Updated March 29th, 2023

Do you stick to a personal budget? If you're having trouble managing expenses, curbing overspending, or saving for your financial goals, a personal budget could help you refine your money management.

Creating a personal budget can seem daunting, but we'll walk you through the process of creating one to make it easy and manageable.

What is a personal budget?

A personal budget is a financial plan that helps you manage your income and expenses. It's a great way to track spending, set financial goals, avoid overspending, and make the necessary adjustments to reach your goals.

A personal budget could be as elaborate or as simple as you want. You could ensure that every cent is counted and allocated each month or loosely use the ideas behind an established budgeting method. What's most important is that you pick a personal budgeting method that works for you.

How to make a personal budget

Start by identifying your income

The first step in creating a budget is to identify how much money you earn and how much money you spend. This will give you a clear picture of your financial situation and help you set realistic budgeting goals.

Start by identifying all your income, which could include your job paycheck, investment returns, childcare support, alimony, or retirement payments.

Categorize your expenses

Once you have identified your income, look at your expenses. Divide them into categories such as housing, transportation, and entertainment. You can then set a limit for each category based on your income and financial goals. For example, you may want to set a goal of spending no more than $200 on groceries that month.

To make this easier, you might want to use a money management app likeMint,You Need a Budget, orEveryDollarto help you automate the categories and calculations.

Once you have a good understanding of your spending habits, you can make adjustments to your budget as needed. This may involve cutting back on unnecessary expenses, increasing your income, or finding ways to save money on your bills.

Set financial goals

To stick to any good habit, we need goals and the promise of something worthwhile to keep us on track. With personal budget plans, tie them to financial goals you want to achieve in the future.

These could include saving for a wedding, a down payment on a home, a dream vacation, or something like clearing your credit card debt or saving up money to invest.

Once you have a clear idea of where you want your money to go, you can start to work towards these goals with a clearer plan of action. For example, you might decide you can allocate an extra $100 in your monthly budget to save for your wedding, which you may not have known was possible until you broke down your income and expenses.

Consider using these budgeting methods

While a personal budget should always be whatever works for you, it's worth looking at established budgeting methods for ideas.

50/30/20 method

The50/30/20 budgeting methodis a simple and effective way to manage your finances. It suggests allocating 50% of your income towards necessities, 30% towards wants, and 20% towards savings and debt repayment. This method can help you create a balanced budget and achieve your financial goals.

It's important to note that these percentages are just a guide, and you may need to adjust them based on your personal financial situation. For example, if you have high debt payments, you may need to allocate a larger percentage of your income toward debt repayment.

The beauty of this method is that it's flexible and allows you to adjust according to your own personal needs and priorities. It's a good starting point for budgeting, and you can use it as a guide to help you stay on track and make adjustments as needed.

The envelope method

Theenvelope methodis a budgeting technique that involves separating cash into different envelopes for each category of expenses and only spending the cash in the corresponding envelope. This method can help you stay within your budget and avoid overspending.

To use the envelope method, you must determine your budget, label envelopes, allocate cash and spend only from specific envelopes. For example, if your housing budget is $1,000, withdraw $1,000 in cash and put it into the housing envelope.

The envelope method helps to control impulse spending as you can only spend what you have in the envelope.

It's important to note that the envelope method is a cash-based budgeting method, and it may not be suitable for everyone. However, you can adapt it to the digital world by creating separate savings pots with your bank account.

The zero-based budgeting method

Thezero-based budgeting methodinvolves creating a budget where your income minus your expenses equals zero. In other words, every dollar is allocated somewhere.

This method can help you achieve your financial goals by ensuring that every dollar you earn is working for you rather than being wasted. It also helps to make sure that you are living within your means and not spending more than you earn.

Regularly review and reassess your budget

Lastly, no matter what type of budgeting method you use, remember to review it regularly. As your income and expenses, goals, circumstances, and priorities change over time, you will need to ensure your budgeting method is still the best option for you.

A personal budget is a powerful tool that can help you take control of your finances and achieve your financial goals. With a little bit of effort, you can create a budget that works for you and improve your overall financial well-being.

Remember that budgeting is a process, and it may take some time to get used to it, so don't get discouraged if you make mistakes. Instead, be patient and consistent, and you'll soon see the benefits of creating a personal budget to manage your finances.

As an enthusiast and expert in personal finance and budgeting, I've spent years exploring various budgeting methods, analyzing financial data, and assisting individuals in improving their money management skills. My expertise is grounded in hands-on experience, extensive research, and a passion for empowering others to achieve financial stability and success.

In the article you provided, several key concepts related to personal budgeting are discussed. Let's break down each concept and delve into further detail:

  1. Personal Budget:

    • A personal budget is a financial plan designed to manage one's income and expenses effectively. It serves as a roadmap for allocating funds to different categories and achieving financial goals.
  2. Income Identification:

    • The first step in creating a personal budget is identifying all sources of income, including job earnings, investments, support payments, etc. Understanding your income provides a clear overview of your financial resources.
  3. Expense Categorization:

    • Expenses are categorized into various segments such as housing, transportation, entertainment, etc. This segmentation allows for better tracking of spending patterns and helps in setting realistic limits for each category.
  4. Financial Goals:

    • Setting financial goals is crucial for staying motivated and focused on long-term objectives. These goals could range from saving for a specific event like a wedding or vacation to paying off debt or investing for the future.
  5. Budgeting Methods:

    • The article mentions several budgeting methods, including the 50/30/20 method, envelope method, and zero-based budgeting.
      • 50/30/20 Method: Allocates 50% of income to necessities, 30% to wants, and 20% to savings/debt repayment.
      • Envelope Method: Involves allocating cash into envelopes for different expense categories and spending only from the designated envelopes.
      • Zero-Based Budgeting: Ensures every dollar of income is allocated, leaving no room for unassigned funds.
  6. Review and Reassessment:

    • Regularly reviewing and reassessing your budget is essential to accommodate changes in income, expenses, and financial goals over time. Flexibility and adaptability are key to maintaining an effective budgeting strategy.

By understanding and implementing these concepts, individuals can gain better control over their finances, make informed spending decisions, and work towards achieving their financial aspirations. Remember, while creating and sticking to a personal budget may initially seem challenging, the long-term benefits far outweigh the effort invested.

What is a Personal Budget and How to Make One (2024)
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