Why Should I Budget for Personal Finances?
A personal, or household, budget lists current expenses and after-tax income for a household. It’s a basic record of how much money is available to pay expenses, plus a detailed breakdown of recurring monthly expenses like bills, housing and food costs, and debt repayment.
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It’s a two-step process to budget for personal finances:
- Creating a budget helps you keep track of your income and spending, and shows you how well your monthly spending matches what you can afford. It also highlights areas where you may want to consider cutting back on spending.
- Sticking to a budget may help ensure you have enough money to meet all of your financial obligations on time and in full, which may have a positive impact on your credit.
Once you learn how to budget personal finances, you’ll be more in control of your financial situation.
Strategies to Budget for Personal Finances
While some people may choose to create a simple budget with a pen and paper, today’s technology has resulted in many free and/or inexpensive ways to budget personal finances on desktops, laptops, tablets, and smartphones.
Whichever option you choose, making a budget requires you to simply total your household monthly income after taxes and deductions, and then deduct your total monthly expenses. Ideally, you should have some money left over. Use this money for savings, to pay down debt, or to meet other financial goals.
Here are four strategies that may help you create a more accurate budget.
1. Separating Wants and Needs
When listing your expenses, start by identifying everything you spend money on as a “need” or a “want.” While this sounds simple enough, some people find it hard to differentiate between the two.
If you’re having difficulty deciding if an expense is a want or a need, remember this: needs refer to basic necessities of life — food, shelter, and clothing. If you cut the expense and still survive, it’s probably a want. If you really can’t function without it, perhaps it really is a need.
Budget to pay for all of your needs first. Then add in the “want” items.
2. Categorizing Your Spending
Some of your expenses are the same amount every month of the year, and maybe even for several years. Known as fixed expenses, many of these are considered “needs” because paying them is nonnegotiable. Typical fixed expenses often include:
- Rent or mortgage payments (principal, interest, and property taxes)
- Home ownership association (HOA) fees or condo fees
- Loan repayments
- Insurance payments
- Childcare costs
- Child support or alimony payments
Other expenses may change from month to month. These are known as variable expenses and may include:
- Groceries, plus health and beauty expenses
- Heat, electric, water, sewer
- Telephone service
- Education expenses
- Transportation (gas for your vehicle and/or public transportation)
Any additional expenses are known as discretionary expenses. These are things that usually fall into the “want” category. They may include restaurant meals, entertainment, hobbies, sports, and travel.
If you’re a frequent user of your Discover card, you can track your spending with the Spend Analyzer. Select a time frame and then view your spending by merchant category — such as supermarket, gas station, or restaurant spending. You’ll quickly see if you’ve gone over your budget in any of these areas.
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3. Including Saving as Part of Your Budget
One particularly effective strategy for personal budgeting includes labeling savings as a budget expense, instead of making saving an afterthought after all your other expenses get paid. The familiar advice to “pay yourself first” ensures that you prioritize saving toward your short-term, medium-term, and longer-term goals, such as buying a house, paying for college, or funding your eventual retirement. The more you make saving a habit, the easier it is to do.
4. Budgeting as a Household
If you have a spouse or other immediate family, it’s important to work together when it comes to creating — and following — a household budget. You should each know how much money comes into your home, and the amount required to meet your budget. This reduces the risk of one of you overspending. Having a budget in place also reminds you what your priorities are.
Budgeting for personal finances shows how well your spending patterns match your income and your financial goals. Create your budget, track your spending, cut costs where you can, and soon you’ll find you’re making progress on your savings and/or debt repayment goals.