Why People Don't Like Budgeting
Many people avoid personal budgeting for a couple of reasons. First of all, our lives are very busy and personal budgeting means an investment of time. We are not willing to spend out time on something unless we feel it's valuable to us. Absent that conviction, we will simply procrastinate or just not do it at all.
Another reason is that many people believe they lack the skills to do it. Nothing could be further from the truth! These days, with all the financial templates available (
http://www.financialsforyou.com/financial_templates/personal-budget-template.php), you don't even need to know your math! Ok, that may be a slight exaggeration, but the math part can be handled by a good template. What you do need, however, is to be organized and have your paperwork available to you.
A Personal Budget is Good for You!
I often think of my personal household as a little business in itself. It's not much different! The paperwork each of us has to deal with in this life is truly staggering. In an ideal world we should all have personal assistants helping us keep it all organized.
The world 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 creates transparency and provides a format for setting and monitoring financial targets.
We may feel we know how our finances 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 any more. Especially for those of us who face financial challenges, a personal budget is a means of gaining control of our finances.
How to Create a Personal Budget
The first step in creating a personal budget is gathering historical information. To this end you will need to obtain 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 organize this historical information in some structured way. A good example of it would be to input it into a well designed personal budget template (
http://www.financialsforyou.com/financial_templates/personal-budget-template.php). Such a template 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 expenditures 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.
Remember, You Also Have 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.
Anticipate Repairs and Maintenance
Have you allocated something to repairs and maintenance? Many of the things we own unfortunately keep breaking down and need either repair or replacement. You will need to make an estimate for repairs, maintenance and replacement and include it in your budget. This is something that can be only partly based on the past.
Getting Out Your Crystal Ball
Historical information is a good and indispensable first step of the budgeting process, but we can't stop with that. Life keeps changing and there are events which you may already have knowledge of with a potential financial impact on you. This financial impact needs to be estimated to the best of your ability and included in your personal budget.
Ready to Budget?
Ok. It seems that we are now ready to actually create our budget. All our information has been entered into our template and we can start looking at the result.
Let's see: have we covered all the categories? If the answer is yes, the next step would be to assess the overall situation. Are we making ends meet? Are we happy with the savings we are able to set aside every month? Do we need to downsize or just fine tune our spending?
Once we get a feel for the overarching goal of our exercise, we can start looking deeper. We now go over the actual as well as estimated costs and ask ourselves some probing questions for each expense category:
* Is what I am spending needed?
* Is what I am spending in this area sufficient?
* Is it adding real value to my life?
* Is the cost of it worth it?
* Should I stay with it or make some changes?
* What would happen to the quality of my life, if I discontinued this item?
Depending on our financial situation, these question may gain urgency. For example, if our financial security is threatened, the questions will evolve more around:
* Is this a necessity or can I survive without it for the time being?
The changes could mean staying with the activity, but changing the supplier to lower the cost. It could mean changing how often we engage in the activity if we find that the cost is too high. Or it might mean that we need to cancel a subscription we forgot you even had, because we are not using it any more and yet it keeps appearing on our bank account and we just haven't noticed it until now - the inevitable part of this process will be some simple house cleaning.
After giving some thought to each line of expense, look again at the big picture. Is the bottom line what you need now? This process typically involves several iterations.
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 sharpens 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, come back for a second round. Remember, budgeting is a process.