Why People Avoid Budgeting
Many people avoid personal budgeting for a couple of reasons. First of all, we are all busy and creating a personal budget takes time. Unless we realize how valuable it is for us, we will likely procrastinate or just not do it at all.
Another reason is that people may think they lack the skills to do it. Nothing could be further from the truth! These days, with all the financial templates available, you don’t even need to add and subtract! But you do need to be organized and have your paperwork available to you.
The Value of a Personal Budget
I often think of my personal household as a little corporation. It really is! The paperwork each individual has to deal with in this life is truly staggering. In an ideal world we would all have personal assistants helping us keep it all organized.
Life has become too complex for us to be able to keep track of our finances in our head without forgetting some aspect of them. Just like any business, our personal life also needs order, transparency and targets.
And this is what a personal budget does. Because of the steps involved in preparing a personal budget, it helps us put our financial activities in order, it provides transparency and helps us set and achieve financial targets.
We may basically know how we are doing just by watching our bank account balance, but I’m not talking about that. Just knowing we are “basically all right” is not enough.
A personal budget is a means of gaining control of our finances.
How to Prepare a Personal Budget
The first step in preparing a personal budget is getting historical information. To this end you will need to gather your bank and credit card statements, your cash receipts, your most important bills, such as insurance policies, major repairs, etc.
The second step will be to process this historical information in some structured way. A good example of it would be a well designed personal budget template. It would have the typical household income and expense categories, which would help you not forget some major area of expenditures.
From my own experience I know that some expenses are hard to estimate. I was once shocked to see just how much I was spending on food. The way I found out was by adding my receipts from all the grocery stores I go to, including the farmer’s market, my specialty Internet food orders, etc.
So, it could be that you will need to start collecting your receipts for a couple of months before you can actually create your budget. But it will be worth it! I promise.
Don’t Forget Annual Expenses
Remember to take into account things you pay for once a year. They will not show up on your bank account until they are due. Things like insurance premium, car registration, membership dues, etc. need to be divided by 12 and allocated to your monthly budget.
Remember About Repairs and Maintenance
Have you allocated something to repairs and maintenance? Many of the things we own unfortunately keep breaking down. You will need to make an estimate for repairs and maintenance and include it in your budget. This is not something that can be easily based on the past.
Quantifying the Future
Historical information may be a good and necessary first step of the budgeting process, but that is not all. Life keeps changing and there are events which you already have knowledge of with a potential financial impact on you. This impact needs to be estimated to the best of your ability.
Getting Ready to Budget
Once you have it all, enter your information into a template and look at the result. Have you covered all the categories? If you have, the next step would be to go over your actual as well as estimated costs and ask yourself some probing questions.
Ask these questions for each expense category:
The changes could mean staying with the activity, but changing the supplier to lower the cost. It could mean changing the frequency of the activity if you find that the cost is too high. Or it might mean that you need to cancel a subscription you forgot you even had, because you are not using it any more and yet it keeps appearing on your bank account and you just haven’t noticed it until now.
After giving some thought to each line of expense, look again at the total. Is the bottom line what you need? Are you making ends meet? If you are, the pressure won’t be so great, unless you would like to start saving more aggressively.
If you are not making ends meet, your expense scrutiny will have to be more stringent.
Play with several scenarios. Think of the targets you would like to set for yourself. Depending on your situation, are there any additional sources of income you could generate?
It Doesn’t Have to be Perfect
If you get this far in your personal budgeting process, you will have had many eye-opening moments of clarity already. In my own experience nothing clarifies your thinking as much as this kind of a budgeting exercise.
Even if your personal budget doesn’t look perfect the first time around and you do not find ways to meet the targets you had in mind, keep at it. You have started the process. And that’s what budgeting really is – a process. You know so much more about your own situation now than before you sat down to do this. Being in control of your finances has begun for you!