One of the keys to achieving healthy personal finances is preparing a personal budget adjusted to your needs.
A budget is the planning of your income and expenses, and it is essential to create one to have a plan of action towards your financial goals. In addition, it will help you improve your economy so that you can have that financial peace of mind that you long for.
In this article I am going to teach you how to make a personal budget following 7 steps. I am also going to share 7 recommendations for your budget to be successful and achieve your dreams.
What is a personal budget?
A personal budget is the place where your financial information is collected. In other words, it is the document that will show all your income and all your expenses expected for a certain period of time.
Normally personal budgets are made monthly. Personally, I recommend you make an annual budget and from that make a monthly one.
Because in an annual budget we have a global and more complete vision of your situation, from which we can start to make a more prudent monthly budget.
Benefits of creating a personal budget
Surely you already know the advantages to spare, but I think it is always good to remember them:
- Get your personal finances in order
- have financial peace of mind
- Know how and where you are spending your money
- Create an action plan to achieve your goals
- Analyze your current financial situation and take steps to improve
What is a budget made of?
A personal budget is made up of the following elements:
All the money inflows you have monthly. You have to take into account both fixed and variable income.
For example: salary, rent, pension or self-employment.
Savings and investments
The money outflows for this purpose.
For example: index funds, retirement, etc.
All money outflows that are used for loan or credit card payments. You should also include here the debts you have with family or friends.
Money outflows for fixed expenses (necessary) and variable expenses (not necessary). Later I will explain how to differentiate these expenses.
How to make a personal budget in 7 steps
Before you start , I recommend:
- Take this task very seriously.
- Set aside a few hours for you to be focused. Use airplane mode on your phone.
- Have your bank statements, receipts or invoices from the last year at hand. The more information you have, the better.
- Create an Excel document for your budget. If you later decide to use another type of tool, you can download all the information from here.
- Prepare yourself a coffee or a tea, whatever you like the most, and put on some music. This moment is yours and it is your plan for the future. You need calm and concentration.
In my experience, the 7 steps that I teach you below are basic for the elaboration of a personal budget.
Step 1: Collect your financial information
As I told you before, I think it is better to make an annual budget and then a monthly one. So the first step is to write down all the expenses and income you had over the last year.
You can find this information in bank statements, receipts or invoices that you have.
In this step, we are only going to differentiate income from expenses. We go to step 2.
Step 2: Classify the information
- Fixed income. Normally the easiest part is usually this, since most only have a fixed income: the monthly salary.
- Variable income. The extra income you have had, perhaps from self-employment, overtime, etc.
Savings and investments
If you have different products, differentiate them. For example: index funds, investment fund, savings account, etc.
If you still do not allocate money to investment , you could consider it as a financial goal.
Expenses are normally classified into fixed and variable expenses.
However, I think it is also important to distinguish leisure expenses, as a type of variable expense. And I’ll explain why, because having activities that we enjoy and that make us happy in our free time is essential. Having a budget is not about giving up living.
- Fixed expenses . They are those expenses that we have to make each month, that is, that are necessary and that we know the amount and when we will make them. Here you will include: rent or mortgage, insurance, taxes, telephone.
- Debts : Payment of loans, credit card
- Variable expends. These are the expenses that will change each month according to our consumption, our habits or routines: supplies (electricity, electricity, water), food, clothing, etc…
- Leisure expenses. Expenses that have to do with entertainment activities, such as: cinema, shows, dinners out, outings with friends, partner, etc…
Before moving on to the next step, add up the amounts in each category.
With this information, you already have a complete vision of the current state of your personal finances.
- When making your monthly budget, in addition to making this classification, the ideal is to have two columns: one for the estimated amounts and another for the real ones. You will review this last column at the end of each month.
- As for fixed income and expenses, they will always be the same.
- But with variable income and expenses it’s different. You will have to take the amounts of the last 6 months to obtain an average amount, which will be your monthly estimate of income or expenses.
Step 3: Analyze your current personal finances
After collecting and organizing your economic information, it is time to look at and understand these numbers.
Is your income higher than your expenses?
Or, on the contrary, do your expenses exceed your income and you are pulling the credit card?
Do you have savings?
Do debts take a large part of your income?
In which category do you spend the most money?
This information, and more, these numbers give you.
Many times facing the economic situation we have is scary. Because it’s time to acknowledge our spending weaknesses. Do we spend a lot on clothes, or on shoes? Do we have a large debt?, etc….
Each person is different and it is very valuable that you can be aware of these weaknesses to improve. This is not the time to feel guilty or ashamed. If not, it’s time to take control of the situation to reach your financial goals, and if you’re reading this, you’re on the right track!
Now that you know what your current situation is like, you can move on to the next step.
Step 4: Define your financial goals
Having a clear objective for which you are making a budget is very important, since it will be the engine to stick to your budget.
Take a few minutes to think about: what you want to achieve, where you want to go, the dream you want to fulfill. Find within yourself that or those goals that you would like to achieve.
Surely you can think of many things… Make a list of those options and order them according to the priority they have for you.
If nothing has occurred to you yet, here are some ideas that can inspire you:
- Eliminate my debts with the bank
- Save for a down payment on a flat
- Have an emergency fund that allows me to cover 3 – 6 months of my necessary expenses.
- Create my own company
- achieve financial freedom
- Travel to the Caribbean
Now that you have your list of economic objectives ordered by priority, you must segment them according to the time to meet them. That is, in the short term (from 1 to 2 years), medium term (from 2 to 5 years) and long term (from 5 years onwards).
When you’re done, you’ll know where you want to go.
As a recommendation, when you define the deadlines, keep in mind that your short-term objectives do not interfere with the fulfillment of your long-term objectives.
Step 5: Create a financial plan tailored to you
In this step you are going to define the path that will take you to those objectives that you defined before knowing your current financial situation.
How are you going to achieve those financial goals?
Although the starting situation of each person is different, and the objectives too. We all have two ways to reach our goals in the shortest possible time:
- reducing expenses
- Increasing income
In both cases, we have to define the exact amount or percentage in order to specify how to achieve it. For example: reduce monthly expenses by 20% or perhaps increase monthly income by €300.
To make this point clearer, let’s assume that:
My financial goal: to have an emergency fund of 6 months in the short term.
My plan: reduce monthly expenses by 20%.
- I’m going to look at my list of expenses. What is the highest expense category?
- When I want to reduce expenses, I will first review my variable expenses. What expenses can I reduce? which ones can I remove?
- I decide that I am going to reduce my expenses in clothes, that I am going to eat out less and that I am going to stop going to the movies for a while.
I am going to allocate this amount that I reduce in expenses to my Emergency Fund, added to the amount that I currently allocate.
Step 6: Help yourself with tools to follow your plan
To make it easier for you to control your expenses and income and estimate them, I recommend using a tool such as an Excel document or a personal finance application.
Choose a tool you’re comfortable with, so you can easily manage your money, forecast, and track your budget.
Step 7: Run and check
Now that you know your financial situation and have decided what they are and how you are going to achieve those long-awaited financial goals, it is time to commit to your financial plan and stick to your budget.
For this, the analysis of your budget is essential, not only to see how much we have spent but on what.
Remember that you want to achieve some goals, and managing your finances is essential to know if we are heading in the right direction or not (in this case, making the necessary adjustments)
I recommend you review your budget at the end of each month and pay special attention to:
- Estimates of income and expenses. Have they been fulfilled? Have I had an unforeseen event?
- Have you met the expected savings?
- Identify in which category expenses have been reduced or increased and look for the reasons
- Take all this information into account to plan for the next month and decide if and which changes you want to make.
Tips for successfully meeting your budget
Sticking to a budget can be tricky at first. Therefore, I want to make some recommendations, so that the commitment to your budget and your goals is successful. They helped me when I started to get my finances in order, I hope they help you too.
#1 Have an economic focus.
If you are reading this post, it is because you have decided to take control of your money. But it is essential that you are clear about your reasons for taking this step.
Perhaps you want to undertake, or become independent or buy a house. Whatever the reason, it has to be a concrete and clear reason for you to be successful with your budget and also so that you can achieve the new financial goals that you set for yourself.
#2 Sort your leisure expenses by priority
Having activities that you enjoy and that make you happy is paramount.
When we try to save, these expenses are usually the first affected. Therefore, if you classify your leisure expenses in order of priority, you will know which ones you want to keep as much as possible.
#3 Keep in mind that there may be unforeseen
When you prepare your personal budget, leave a space for possible unforeseen events, both in terms of expenses and income.
An unexpected income (inheritance received, prize) is undoubtedly a source of joy for your pocket. However, an unexpected expense will reduce your monthly savings and increase the term of your goals. For this reason, it is important to work on your emergency fund to face possible unforeseen events without compromising the fulfillment of your financial goals.
#4 Identify your spending weaknesses
Perhaps you are addicted to online shopping, or to flashy supermarket offers, or you frequently buy food at home because you don’t like to cook…. Do you identify with any of these activities?
Acknowledging your weaknesses when it comes to spending can make you afraid or embarrassed. It is normal, seeing how our routine actions decrease our money is not pleasant.
But I have good news for you: you can change these negative financial habits and create new routines that help you meet your goals.
#5 Identify your ant expenses
Perhaps before making your budget you have already thought about those habits that you could change to cut expenses.
Make a list of the habits you now have that are costing you money. Most of them are known as ant expenses . For example: a coffee every morning, buy a snack at noon, eat out… If you add up these expenses at the end of the month, you will see how much they influence your accounts.
You don’t have to cut them all, it’s about recognizing them and thinking about the ones you are willing to change or eliminate from your list of expenses to reach your financial goals.
#6 Create new habits
When I started to get my finances in order, I made small changes in my routine, but with great results. I share them with you in case they can help you:
- At the end of the day, write down all the expenses made during that day. Even if they were small. I do it using an app, but you can do it in Excel if you like it better.
- Make the shopping list before leaving home, and go to the supermarket with a full belly.
- Before making a major purchase, give myself 24 hours to think about whether it’s a necessary purchase or if it can wait.
- At the end of the month, review how much and what I have spent the money for that month.
- Automate a transfer for savings every month.
- Give more importance to savings. Think of my monthly budget as: income – savings = expenses , instead of income – expenses = savings
#7 Seek professional advice
If you think that you cannot do this task alone, you can seek the services of a professional. It will help you to have the appropriate financial planning for your needs and it will take away your headaches.
If you have decided to put your finances in order and create your personal budget, let me congratulate you. You are taking a big step towards your financial peace of mind.
I have shown you the 7 steps you can follow to control your money and put together the action plan to achieve your goals. I have also given you some recommendations that helped me when I started to organize my finances. I hope all this information has been useful to you.
I have given some examples in the article and now I would like to know, what is your financial goal for which you want to organize your finances?