10 Step Guide To Create Your Personal Budget
Posted on November 12, 2022 by Tammy Shweiger CPA, One of Thousands of Money and Finance Coaches on Noomii.
A strong “why” is an essential ingredient for your budget’s success.
1. Begin by establishing a “why” to motivate you. You can revisit your “why” when you feel you are going off track. A strong “why” is an essential ingredient for your budget’s success.
Examples: I am going to stop living pay check to pay check. I am going to save for the future. I am building generational wealth. I deserve more freedom and choices. Choose one that feels right to you, as “whys” are personal.
2. Determine monthly household net income. Look at the past 3 months and calculate the monthly average. If you or your partner are self-employed and/or your income fluctuates significantly month to month, chose a conservative number that is the average of a not-so-great quarter.
3. Record and analyze expenses for the past 3 months. Check bank statements, credit card statements and receipts. Get in the habit of writing down when you spend cash. Write down even small expenses. For each expense, assign a household category (ex. groceries, medical bills, entertainment), and if you can, why you made the purchase.
4. Identify each cost as variable or fixed. Variable Expenses are expenses that change month over month, or can be easily cancelled. Fixed Expenses are expenses that are the same each month, or cannot be easily cancelled.
5. Next add up household category totals for each month so you can take a look at what actually happened. Take the monthly average of each category.
6. Use the average cost of the last 3 months to assign a category GOAL for next month. For example, in the last 3 months your spend for groceries (this tends to be the highest variable category for most households) was $653, $890, and $784. Perhaps a good goal for next month is $775, the monthly average. Note if there was a special event that caused a month to be unusually high or low and adjust accordingly.
7. Maintain your budget, don’t just set it and leave it. To do this, go back after the month is over and calculate, are you over or under your budgeted amount? Are there certain categories that are significantly over budget each month?
8. Calculate your total expenses vs your total income, to see if you have a positive or negative cash flow. You can reduce your goals for certain categories to increase cash flow. When you increase cash flow, you can use the funds to achieve other goals like paying off debt or saving for a vacation or retirement.
9. Take the opportunity to study your behavior. Is there a pattern of behavior for when you go over budget? Are you Bored? Stressed? Happy? Concentrate on variable expenses for this step. In the short term, focusing on variable expenses will give you the most control over your budget. In the long term, lowering your fixed expenses and increasing your income are achievable goals as well.
10. Be kind to yourself, budgeting is hard, emotionally and as a time commitment. Common mistakes first time budgeters make: Not including anything for themselves, never coming back to review budget versus actual, placing too much pressure on themselves to be perfect, and not being realistic. So if a month doesn’t go as planned, that’s normal and ok. Keep going!
Don’t want to go it alone? I can help. Book a free consultation with me today!
