Did you know that over 63% of Americans’ personal finances have been affected by the Covid-19 pandemic?
It is in critical situations like this when we realize how important it is to be financially knowledgeable and prepared for the unexpected.
Numerous financial literacy programs can help you better understand how to control your money and not allow it slip through your fingers.
One of the best ways to demonstrate financial literacy is to plan a personal budget and strictly follow it.
Here we will guide you through the process of planning your own budget and tips to stick to it.
Why Is A Personal Budget Important?
You do not need to have a big dream like buying a house, a new car, a fancy designer dress or going on an exotic journey to have a personal budget.
The chances of inheriting millions or hitting the lottery aren’t typically high, which means you likely live on the income you make from working, and possibly other financial sources such as alimony or income from a rental property.
For many people, the problem is that part or even all of the money vanishes in the form of expenses for food, utilities, taxes, you name it.
Having a personal budget is like solving an equation: you have to match the money coming in to the money going out.
Planning and sticking to a budget will ensure you do not overspend and always have enough to cover your current and future expenses. It can also help you save for emergency situations like losing a job, repairing a car, getting hurt in an incident and needing treatment, helping a relative in need and more.
Long-term, a budget will ensure you have enough to pay for important occasions in your life: a wedding, the birth of a child, buying a house, taking a trip or working towards an additional degree.
Sticking to a personal budget means peace of mind and confidence that you can face any expected or unexpected event that comes your way.
Personal Finance Insights
Talking about money is important. But what is more important is to be well educated on financial topics.
Have you wondered why?
Here are some disturbing personal finance statistics that may provoke you to take measures and not become a statistic.
- Americans lost $1,634 due to lack of personal finance knowledge in 2020, much more than in 2019 ($1,279) and 2018 ($1,230)
- 90% of students are not ready to pay their students loans starting October 1
- The average millenial has a credit card debt of over $4,000
- 39% of Americans have enough finances to cover an emergency amounting to $1,000
- 15% of Americans have not saved anything for retirement
- 40% of Americans have less than $300 in their savings account
- 59% of Americans live from paycheck to paycheck
- 28% have a financial plan written down
5 Ways To Plan Your Personal Budget
Planning your personal budget might sound frightening and difficult at first glance. You may be lost in figures and calculations, forget to add some of your monthly expenses and feel insecure, incompetent or overwhelmed.
Remember that discipline and determination are crucial to properly manage your money and follow several easy steps:
Preparation is the key to success. Allocate enough time to work on your personal budget. Collect household and credit card bills, bank statements, saving and pension fund details, and anything else you might need to create your budget.
- Calculate The Money Coming In
Consider every amount that arrives in your pocket. That could be your job payment, a side business, additional freelance contract, investments or more.
Do these numbers represent a steady monthly cash flow or are they accidental and irregular? Jot down your earnings for the last three months and calculate the average to forecast your expected income over the next time period.
- List Your Monthly Bills And Expenses
Write down everything you have to pay for: mortgage or rent, utilities, internet or cell phone bills, student loans and more. Include your car or medical insurance expenses or any other spending you may think of.
This will give you a detailed picture of where you need to allocate finances and on what time basis they are due.
Categorize the payments to get a better understanding of where your money goes. The categories may include utility bills, mortgage, groceries, car expenses, childcare, gym, medicine — anything that is a part of your expense routine.
Write down your expenditures for the last three months and calculate the average to plan your forecasted expenses for the coming month.
- Subtract Your Expenses From Your Earnings
The amount left after you take out your monthly expenses from your monthly income provides information on how much you can save or spend on non-priority things like leisure or drinks with friends.
- Draw Conclusions
If your monthly expenses do not exceed your income, that is great news — you can optimize your personal budget and allocate funds for saving, investing or fun.
If you spend more than you earn, planning a personal budget and sticking to it turns into a top priority. It will help you to stay responsible to yourself, your personal dreams and your loved ones.
Tips To Stick To Your Personal Budget
It is not always easy to follow a plan, especially when money is involved. In a world full of temptations at every step, there might be moments when you slip and spend more than you have intended to.
What do you think will happen?
Depending on the amount spent, you may go into debt, delay priority payments, or even be evicted from your home.
Here are several tips to make sticking to your budget easier.
- Set your personal finance goals. Determine an exact number for the amount you want to save on a monthly/quarterly/annual basis. Looking at your desired goal will stop you from overspending.
- Make your financial goals SMART. When they are Specific, Measurable, Achievable, Realistic and Time Bound, you will track the results in a fast and easy way, no matter if it involves payment of a student loan, savings for an excursion abroad or a new outfit.
- Set A Realistic Budget. Plan your future spending according to your expected income and always leave a reasonable amount to save and have to cover unexpected expenses.
- Stick To Your Planned Budget. Follow your plans. In case something unexpected comes up and the plan is altered, revise as soon as possible to go back and achieve what you planned for.
- Live within your means. Never spend more than what you earn.
- Identify what expenses could be cut or decreased. This can refer both to necessities and non-priority items. If your rent is too high, move to a place with lowers costs or consider a roommate. If you spend too much on groceries, buy in bulk or use discount coupons. If you waste big amounts on memberships, subscriptions or leisure, reduce them by leaving what you value most. Cut everything you do not need.
- Plan your purchases and meals. Stick to a shopping list containing the items you generally buy. Don’t overstock and don’t buy on impulse.
- Shop online. This will give you more time to think, compare with other similar items and make a decision.
- Consider and reconsider big purchases. Give yourself enough time to think over whether you really need something, especially if it is not on your priority list.
- Reduce your credit card limit. This will prevent you from impulsive purchases that can overthrow your budget.
- Think about how spending connects to your work. Calculate your hourly wage and every time you want to buy a non-priority item, consider how many hours of work it costs.
- Budget to zero. Plan your personal budget in such a way that income minus expenses amounts to zero. That does not necessarily mean you must spend everything you have. It implies that every cent has been assigned to a particular financial section. This gives excellent opportunities to start saving.
- Embark on a zero spend challenge. Some call it spending freeze or no-spend but the goal is the same: don’t buy anything you do not need.
- Use an app to track your budget. List your expenditures under the defined income and expense sections. Import credit card and bank transactions. Pay attention to every warning you have exceeded your budget. You can choose from Mint, PocketGuard, YNAB, and more.
- Remember that minimalism is a trend. In a consumption-oriented society responsible people do not clutter their environment with unnecessary things.
- Reward yourself within your means, every time you reach a set goal.
Planning your personal budget is one of the basic points of financial literacy.
It gives you a detailed picture of how money moves in your daily life and how you can control this movement.
Sticking to your budget will motivate you to consider a new approach to your financial status, save, have fun without worries and stay prepared for any challenging situation you may face.