Let`s start with something fundamental when it comes to the field of Personal Finance – Budgeting. I`m sure that the topic can be really annoying and boring for the most of the people. To be completely honest- the topic was boring and annoying for me as well. When I started preparing my personal finances budget – I hated it. It was too much work. It was really time consuming and I wasn’t sure if there will be a benefit from doing it.
Few years later I`m really glad that I was able to overcome the short term pain of preparing a budget. Actually, I believe that everyone should try to overcome this short term pain and start preparing a budget on a regular basis . I was able to see the benefit only after few months of doing so. Let`s see what is a proper definition of a personal budget.
A personal budget is a financial plan. It outlines an individual’s expected income and expenses over a specific period. This period is typically a month. It serves as a tool for managing personal finances by helping individuals track their spending, prioritize expenses, and identify areas for savings. The primary goal of a personal budget is to ensure that one lives within their means. It also helps in planning for future financial goals. These goals include saving for retirement, paying off debt, or making significant purchases. By regularly reviewing and adjusting a personal budget, individuals can gain a clearer understanding of their financial situation. They can make informed decisions about their money.
Now that we know what a personal budget is, we are aware why it`s crucial to have one. Also we will need a starting point. In my opinion it`s really difficult to create a budget without some data about our habits. Here the expense tracking comes to help.
I`ll share some background on my relationship with expense tracking. When I was younger I was watching my father writing down his expenses every single day. He made that his routine. He comes home after work and starts making a detailed analysis of his spending during the day. Back then I thought that this is completely unnecessary. My belief was that there is no need for this time consuming activity. I was thinking that I`ll never lose my time doing this. As more often than not, the younger me was wrong. I became a student and I had to manage my finances on my own. Of course, the first few months weren’t a great success. And then I realized – I need to track my expenses and to make a budget. And so I did. In the beginning it was really annoying and time consuming. This was normal, since I just have started and I had no data available. I was able to overcome the difficulties during my first tries and then, it became easier. Currently, after years of practice it’s even easier. I`m practically doing it in my head.
OK, enough of my stories. Let’s get a bit more practical. For a good budget we’ll need some good amount of data about our spending habits. I believe that one or two months of cash flow analysis is a good place to start. It would be the basis we need for creating a budget. By cash flow analysis, I mean recording all the income received in a month and all the expenses made within the same period. For the most of us we have just the salary in the income part. But if there are any additional income streams (hopefully) they also should be recorded in this part.
Now we are moving towards the more important point – expenses. Obviously, there are two ways to make the financial picture look better – receiving more income or lowering the expenses. Usually , the most of us don’t have much control over the income part. So, we should focus on lowering the expenses. In order to do so, we’ll need information about our current spending habits. And here comes the fun part. We need to write down our expenses every single day. There needs to be a description (at least a category) for every single expense. Categories can be – food, rent, gas, maintenance, movies, video games, electronics, coffee, restaurants etc. Pretty much everything we spend money on. I believe that it should be fine just to have some categories. It`s not that necessary to write down the exact coffee shop where you had a cup of coffee.
We already know how important is to track our expenses. Now the question is how we do that. There are two main options. We can write them down on a piece of paper. Or you can use an app for this purpose. I`m assuming that the first option isn’t really appealing, so let’s concentrate on the second one. There are a lot of apps available in the app stores for every device. Over the years I have used some of them and I can say that they are doing a pretty decent job. I won’t be saying which are my preferred ones, since I’m biased. But going through the screens and the reviews of the apps everyone will be able to choose his favorite. Currently, I do it by using Excel. I find it most convenient for me. I have created all the categories that I need. I have prepared few templates which makes my life easier. So that’s my way. No matter which option you’ll choose I believe that it’s really important to prepare such personal income/expense report.
After we have gathered some data about our spending habits we can put it all together. When consolidated on a monthly basis the expense report can show us where we spend the most of our money. Using this consolidated data we can determine if we are spending on the things that are important to us or not. By examining the numbers, we can fine-tune our spending. This allows us to dedicate more funds to the things that matter. We can also cut down on the insignificant ones.
I believe that the idea behind a budget is not to make us unhappy by just cutting down expenses. I believe that its role is to actually make us happier. It allows us to focus on spending on the things we love. Everybody can fine-tune the budget the way he/she sees fit. Of course, there are some guidelines which are nice to adhere to. We will discuss them in a later post. So stay tuned.
Disclaimer:
I am not a financial or investment advisor. The content of this post represents my personal views and is purely informational. It should not be taken as financial or investing advice. Please do your own research and consult with a qualified financial advisor before making any investment decisions.
Disclaimer on the use of AI: Some of the information may be generated by using AI. Always double check the information and do your own research.
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