The Basics of Building a Personal Budget

Knowledge is power: Understanding how much money you spend, and how you spend it, versus how much you earn can empower you to take control of your finances. A personal budget is a fundamental tool of good money management, and having one can help you save money, spend wisely and manage your financial outlook.

Building a personal budget isn’t difficult. Start with learning everything there is to know about your spending. Online budget worksheets can help you put your finances in an easy-to-understand visual format that shows your monthly earnings and expenditures. Find a worksheet that speaks to you, and then plug in:

  • Monthly income – This should include every penny you and your partner make each month, from the paycheck you receive from your full-time job to any extra you might make from freelance gigs like babysitting, housecleaning, etc.
  • Recurring fixed expenses – These are the bills you must pay every month. Typically, they include rent or mortgage payments, utilities, mobile phone bills and more. Reducing these bills would be difficult. For example, your mobile phone may be under contract with the expense fixed for a few years.
  • Recurring flexible expenses – These are things you must spend money on every month, like groceries, but over which you do have some control. For example, you can lower your food bills by reducing how much you eat out and by using coupons when you go grocery shopping.
  • Discretionary spending – When you splurge on a new outfit that you didn’t really need or go to the movies on Saturday night, that’s discretionary spending. It’s money you don’t necessarily have to spend, but you choose to. This is the area where people can get into a lot of trouble, and it’s also the first place you’ll look when you’re deciding what expenses you can cut in order to better balance your personal budget.

Once you have all your spending spelled out in black and white, it’s time to look at how your finances currently end up at the end of the month. Do you make more than you spend? Good for you! How can you put the excess to work for you at the end of each month? Will you increase your retirement savings? Use it to build up your emergency fund?

If you’re in the red – meaning you spend more than you earn – you’ve likely been making up the difference on credit cards. Maxing out your credit cards can negatively impact your credit scores. Credit card debt can also create a difficult financial burden. If you’re spending more than you earn each month, it’s time to examine your budget and decide where you can cut back. The severity of your deficit will probably drive how aggressive you have to be with cost-cutting measures. Eating out less and limiting yourself to just one or two fun purchases a month may be enough if you’re not too far in the red. Or, if you’re struggling with a lot of debt, you may find more radical measures are necessary, such as cutting vehicle expenses by selling the brand-new car that you owe a lot on and replacing it with an older, cheaper model that you can pay for in cash.

Sticking to a personal budget can be much more challenging than creating one, but staying on budget can provide multiple awards. A budget can help you save more money toward a financial goal like buying a house or retirement investments, and it can help you feel more confident and in control of your finances.