Do you often find yourself thinking about a finance plan to analyze whether your future income will be enough to meet your expenses, savings, and debt repayments. This plan is called a personal budget. While creating a personal budget, also called a home budget, past expenditures and current debts have to be taken into consideration to get a fair idea of your financial situation. There are various ways to calculate your budget. There are tools that will help you create, use, and work around a personal budget. The effectiveness of a tool depends on the accuracy and relevance of the data.
Here are some popular tool to create a personal budget:
- Pencil and paper: One of the most tried and tested tools is pencil and paper—usually, with the help of a calculator. Earlier pencil and paper were effective formatting tools as far as a budget was concerned; today, technology has made this tried and tested method almost redundant, with its time efficient means of providing results. However, a paper and pencil or a calculator are useful for organizing budgets in a file cabinet. For a file cabinet or a ring binder, the simplest way to keep a budget by bookkeeping. this can be done by filling in charts or forms in budgeting formats.
- Spreadsheet software: Another tool is the spreadsheet software. Spreadsheet software helps you perform calculations with the help of formulas. These, for instance, help keep track of your income and expenditure. However, spreadsheet software doesn’t allow for shifting of dates and so information has to be shifted around according to convenience.
- Money management software: This is another tool written specifically for budgeting or money management. The products on this software track information of individual accounts including money market, checking, and savings account. The software can read past expenditure and give a monthly report that is handy for budgeting future monthly expenses.
- Spending management software: This is a variation of money management software. Money management software calculates one’s future personal income by figuring out expenses, amount to be saved, and the amount to be allocated towards debt repayment. But, spending management software calculates all of these against a known amount of money as opposed to a projected amount of money. This provides information on the amount the user can spend in a given month after spending their expenses. The advantage of this plan is that it eliminates the guesswork involved in plans that only estimate what a person’s income or expenditure is based on an allocated amount when it comes to budgeting. To get a hold of a current status report, some spending management software are connected to online bank accounts.
A personal budget has its advantages. But it also has a few pitfalls that can be avoided by following certain practices. Here are some of the things to avoid:
- It will help if a personal budget has a specific goal that has to be achieved within a specific time. One should be aware of the source of income, the amount of income, and the amount allocated to expenditure.
- Keep the process simple. If a personal budgeting process is complicated, one could lose the motivation to stick to it. The idea of a personal budget is to be aware of the income and expenditure for a family or an individual. It is not to predict the time when one can buy something.
- Be aware that a personal budget is flexible by nature. It is understood that the amount involved in the budget would change from month to month. Therefore, personal budgets require monthly reviews. If there are cost overruns in a particular category, they should be prevented in the next month’s budget. Despite your best efforts at sticking to the budget, if you spend $20 more on a certain area of your budget, deduct $20 from other categories in the following month’s budget to make up for the previous month’s overdraft.
- If your family lives on an irregular income, you will have to take extra care in budgeting your income and expenditures. This is because you might either spend more than your average income or run out of money towards the end of the month even if you are on an average income. In such cases, it is important to calculate, more or less accurately, the yearly income. Expenses, which are usually constant, should then be maintained a little below the estimated amount. It would do well to maintain expenses at five or ten percent below the income you estimate. If carried out properly, a normal household should have about five percent of the income left over by the end of the year.