Personal Budgeting 101
What is a Budget and Why Do I Need One?
Why is a Budget Necessary?
Identifies and defines your financial goals
Manages your money
Directs your money flow
Increases your savings
Avoids spending money unnecessarily
Achieves your personal goals
What is a Budget?
"...a plan for the coordination of resources and expenditures" - Merriam-Webster Online
Dictionary
Simply put, a budget is a plan for managing your money in a way that best meets your
personal needs and wants.
Seven Keys to Effective Budgeting
1. Identify and develop personal goals
2. Evaluate and record current trends, both income and expenses
3. Assign priorities
4. Develop a timeline for the month
5. Keep it simple
6. Remain flexible: "One size does not fit all"
7. Review and revise
Budgeting is Effective Money Management
Effective money management is planning how to get the most from your money.
Good money managers keep track of where their money goes so that they can make it go
farther.
Effective money management includes:
o Developing personal financial goals
o Organizing personal financial records
o Creating a personal monthly budget
o Evaluating personal financial health
Adjust plans, activities, and spending as needed
Spend money cost-effectively
Reach the specific goals you have set
Strengthen the internal control system
How Do I Create a Budget?
Creating a budget begins with a clear, accurate, and well-thought-out plan.
What’s in a Budget?
Income
Simply any money earned or contributed to your household from either personal finances or a
business.
Expenses
Money that you spend, including anything you purchase. This includes both planned and
unexpected expenses.
Steps in Budgeting
1. Set Financial Goals
Identify and write them down
Long-term (1-5 years)
Short-term (within a year)
Make them achievable, practical, and owned by everyone
Keep them in the forefront
Journal the process
Celebrate their completion
Write them into your monthly budget
Adjust them as necessary
2. Estimate Your Income
Make a list of each income stream that you receive on a regular basis each month. The key is to
only include that income you get every month.
Include both monthly wages earned from your job(s) as well as monthly supplemental income
(e.g., child support, disability, etc.).
Mark down the date these are received.
Calculate the monthly income total.
Record but do not include any periodic income you may receive at this point.
If your income is unpredictable, estimate what you will receive in the next month and adjust it
down a little.
3. Record What You Spend
Review the previous month’s checkbook ledger, bank statements, etc., and record your spending
and income.
Record what you spend for the next month and write down what your actual expenses and income
are.
4. Budget for Actual and Unexpected Expenses
Actual Expenses:
Identify fixed expenses (e.g., rent, car payment, student loans).
Record the monthly payment deadline and plan according to your payday
date.
Variable Expenses:
Identify recurring expenses that fluctuate (e.g., monthly groceries,
automobile expenses, etc.).
Calculate an average based on previous months. Note: when in doubt, guess
high!
Consult with friends and family on what they spend.
o Examples of Actual Expenses:
Rent or mortgage
Car – payment, upkeep, gas, etc.
Insurance (health/medical, life, auto, home, etc.)
Food
Household utilities
Clothing
Entertainment
Student loan payments
Child care
Medical bills
Savings (transfers to savings account, retirement fund, or brokerage
account)
Vacations
The FIRST Step: Creating and Maintaining an
Emergency Fund
Initially, the Emergency Fund should be $500 - $1,000, depending on your income and debt
load.
Eventually, you need to increase this to 3-6 months worth of income.
Develop the attitude that this is ONLY used for EMERGENCIES (e.g., unemployment,
unexpected medical needs, or any other financial crisis).
If money is used from this fund for an emergency, the priority for the next month is to re-
supply the fund.
Remember: Murphy always strikes!
Budgeting Terms
Surplus: Occurs if you have a positive cash flow.
Deficit: Occurs if you have a negative cash flow.
Discretionary Income: The money you have left over after paying for essentials.
o Used to evaluate the strength of a person’s income.
o Represents the money you can spend on wants.
Review & Evaluate
Review on a monthly basis, especially when you begin the process.
Evaluate the budget against your personal financial goals.
All monthly deficits need to be addressed immediately.
Any surplus should be added to savings.
Consider operating on a cash envelope system.
Do not get discouraged.
Practical Budgeting Tips
The budget must balance.
Income must equal expenses.
o If you make money, you must have a ‘destination’ for that money.
o This does NOT mean you must spend it. Planning to put money into savings is a
great idea.
Plan carefully:
o Estimates should be based on data.
o Cover all expenses.
Be practical.
Be flexible.
Write your budget down.
Be able to access your budget data easily.
