It is easy to understand the basic concept of budgeting but applying those ideas to creating a meaningful budget for your own personal finances is not always that easy if it is not something you have done before.
If you have never created or followed a budget before it is definitely worth finding out how to go about changing that and taking a greater level of control over your money, and where it all goes each month.
Here is a look at why it is so important to create a household budget, plus tips on how to set about creating a budget that works. There are tips on how to use the information to plan and why it pays to develop the habit of scrutinizing your spending each month.
Into the Unknown
You should never let the fear of the unknown hold you back and that approach applies to creating your personal finance budget.
Budgeting can be daunting and even confusing at times when you don’t really know exactly where to start and how to put all the numbers together in a meaningful way so that you can see exactly what your financial position is at any given point in time.
Knowledge is power and it gives you a greater degree of confidence, which is why budgeting is so important as it gives you all the information you need to be able to make an informed decision about whether you can really afford something.
For example, if you were thinking about buying a new car and you were checking prices on a Hyundai, it would be much better to know exactly what impact the monthly payments will have on your finances and to know exactly how much you can comfortably afford out of your budget.
Gathering All Your Financial Information Together
Your starting point for creating a budget is to ensure that you have all the relevant information you need on hand.
Start by making a detailed list of your monthly expenses. Leave nothing out of that list, however insignificant it might seem, as you need to know how much you spend each month on lattes on the way to work, just as much as you need to know what your fixed expenses on rent or mortgage, utilities, etc cost every month.
Gather up your bank and credit card statements for the last three months and start keeping receipts for all of your spending so you can check those against the statements.
The information from your bank and credit card statements will help you see what you have been spending your money on, and you will then be in a position to put these number into your budget worksheet.
Some people like to use a spreadsheet as the formulas can be added to do some of the calculations for you, but you can also write everything down on a piece of paper if that is how you want to do it.
It doesn’t really matter how you record the data as long as you accurately gather details of all of your monthly expenditures, which you can then compare to your income.
The Big Reveal
If you have not created a personal budget before you are most likely in for a bit of a shock when you first crunch those numbers and see your finances laid bare in front of your eyes.
Many of us tend to underestimate our spending or level of debt so you would not be the first to get a bit of a wake-up call on your financial situation once you create your budget and reveal how in the red you are.
It might be that you get a pleasant surprise and your finances are in better shape than you thought.
Whatever the outcome, at least you now have accurate financial information to rely on and plan ahead with rather than relying on guesswork.
Plan of Action
Once you have created your personal budget and know how it all works, use that knowledge to work out how to plan for certain events like major holidays and retirement, and see where savings could be made by cutting out wasted or unnecessary spending.
Creating a budget is the first step towards greater financial control and the next step is to make a commitment to stick to working on a budget every month from now on.
You will almost certainly see your finances in a new light when you create your first household budget, and at least if you are thinking about buying a new car or any other major purchase, you will have a much better idea of if you can actually afford it, or not.