The world of finance is now much more than just a guess as to how much debt people have. Instead, it’s become a data point that can be used to guide people towards the right financial decision. In an increasingly competitive marketplace, it is important to have a plan B when the going gets tough.
The Personal Finance budgeting is one of the best ways to help people avoid financial ruin and stay on track with their spending habits. Keeping your finances in order can help you focus on long-term goals while also keeping your personal expenses at a fair value.
Let’s take a look at what kind of things you need to spend on in order to meet your financial goals, and how you can use a budgeting guide to do so.
Table of Contents
What Is A Budget?
A budget is a plan you outline for your money and resources so that you can manage your spending, achieve your financial goals, and have enough money to last you until your retirement.
The purpose of a budget is to provide you with a plan for how to spend your money so that you have enough money to cover all of your expenses and still have a comfortable monthly income.
How does budgeting helps in managing personal finance?
Budgeting is very important aspect of Personal Finances. What makes a budget important is that it –
- helps you understand your spending habits
- identifies where you need to improve your finances and
- offers a way to address that
You need to budget to help you establish when and how you’re going to pay your bills. Once you’ve defined your spending priorities, you can begin to identify possible investments that can help you achieve those goals.
You can use a budget to help you manage your financial exposure to certain technologies and industries. Based on your goals (short term/long term), you can choose the industries/technologies where you can invest your money.
Financial Goal Setting
A Personal Finance Budget enables you to clearly delineate your spending priorities and help you achieve those goals.
It’s also a good idea to set a budget limit that you can live with or waive when circumstances demand it. This kind of thing is called “financial goals setting,” and it’s something that you need to do with all your financial goals.
For example, it can help you avoid having too much money left over for interest or taxes. It also helps you stay focused on your main goals, which are surviving and growing old.
Financial goals can be – paying off student loans in 5 years, saving downpayment in 3 years, having X amount by your retirement or saving for children education etc. Once you define your financial goals, you keep these goals as driving factors for your budget.
Knowing Where Your Money Goes
Another important part of Budgeting is knowing where your money goes.
This is important because it is essential for you to set financial goals. Once you have control or understanding of your expenses, it will be easy to plan for your savings & investments.
Your spendings or expenses can be categorized into 2 important parts – “wants” and “needs”. Understanding the difference between the two is very important for Personal Finance budgeting.
A need is something which is obsolete necessity to live and function. For example – Food, shelter, clothing, education, health etc.
A want is something which is desirables to improve your quality of life. For example – Restaurant, high end furniture, vehicle etc.
You can read more about the differences between needs and wants here.
What Should Be On My BUDGET?
You don’t need to go into detail about how you want to use your budget but it’s important to think about how you can make the most of it.
One way to do that is by using a budget to help you decide what you want to spend each month.
You can use a budget to help you decide how much money you need to put away in your savings account or use a spreadsheet to help you plan out your monthly budget.
Another way to use a budget is by setting a maximum spending limit on certain expenses that you feel you need to maintain a certain standard of living. This will help you stay on track with your budget and increase your retirement savings.
How To Use A Budgeting tools
If you simply use a spreadsheet to track your spending, you’re probably already planning a budget.
There are many different types of budget tools that can be used to track expenses. Some people use budget management software/apps that allows them to track their spending, while others use a spreadsheet to keep track of their spendings.
Using spreadsheet planner or apps is a personal choice.
Both these types of tools are equipped with many Personal Finance Budgeting rules. So you need not worry about them. Like there is rule of 50/30/20 or the rule of max housing spend (rent/mortgage) etc. We will discuss those rules in details but if you are using the tools, these rules are already incorporated there. They will alert you in case you are invalidating any of those rules so that you try to adjust your budget accordingly.
Now a days apps comes with lots of advanced features. Some apps even connect to your bank accounts to provide you details on your spendings. You can even connect your investment portfolios to track how your investment goals are performing. At the same time Personal finance budgeting spreadsheet planners are are simple to use and are used by many people.
Below are some of the tools you can try based on your preference.
Personal finance budget spreadsheet planner
There are multiple planners you will find over internet. Some are very simple which some covers complex scenarios like mortgage etc.
I would suggest you to go over the different planners collected at weblink (16 Top Free Excel Family Budget Templates) and decide which one is suitable for you. Once you decide on the planner, it will be your trusted guide in your budgeting journey.
Personal finance budgeting apps
As we all are moving towards digital words, many people are more conformable with using a desktop or smartphone app instead of simple spreadsheets. Apps by nature bring in easy to use functionalities.
As with budgeting spreadsheet planners, we have many budgeting apps in the market. Many banks or financial institutes have come up with their own apps. These apps even connect & integrate with your banking account, investment account and provide you complete picture of your personal finances.
My recommendation which I personally use is the Mint. This is free app which is available in both App store and Google Play. This is very easy to use app which you must try.
If you want to know about different free & paid app options available in market, you can read – The 8 Best Budget Apps for 2022
Personal Finance budgeting rules
Rule of 50/30/20
As per this rule you should try to budget in such a way that you should not spend more than 50% of your monthly income on “Needs”, no more than 30% money should be spent on “Wants” and at least you should save 20% or your monthly income. This collectively forms the rule of 50/30/20.
We discussed about “Needs” vs “Wants” earlier in this blog. So now you know on which part of your expenses what will be your limit.
You can watch this short video if you want to learn more about 50/30/20 rule.
Rule of 10-20 or Rule of 70-20-10
If you see the rule of 50/30/20 doesn’t provide any guidelines on debt management. Study shows that if an individual or family debt takes up 10% or their monthly income, those are less financially stressed.
This is where the rule of 10-20 comes up. It will help you understand if you have too much of debt and whether you should prioritize future spendings to lower the debt %.
The Rule of 10-20 (or 70-20-10) says, you should have maximum of 10% of your income going towards any debt repayment (excluding mortgage), 20 % going towards savings and 70 % towards other living expenses.
If you look Rule 50/30/20 and Rule of 70-20-10 together, you will understand that you need to carve out this 10% debt repayment portion from your “wants” part. That means higher the debt repayment %, you should spend lower on your “wants”. Isn’t it interesting ?
Rule of 28/36 for home buyers
This rule guides home buyers on deciding how much money they can budget towards mortgage payments.
As per rule of 28/36, your should budget to spend no more than 28% or your monthly pre-tax income and this amount should not be more than 36% or your total debt. This is also known as the debt-to-income (DTI) ratio.
Interesting read for Personal Finance Budgeting
Budgeting Doesn’t Have to Suck: For Young Adults Who Want More Money
This breakthrough book from Accountant and personal finance expert Jim Miller is the most inclusive guide on how to get more money… in just 100 pages.
Budgeting Doesn’t Have to Suck is that inspirational, one-hour meeting that starts on time and ends with you feeling supercharged and ready to act—now in an expanded 2nd edition.
The book will teach you – the best budgeting tools for you, how automation will lead you to financial success, what to do if you have nothing and are struggling, how not to feel guilty about spending on what you love etc.
You will totally love it !
Also read : Personal Finance For Beginners
Summing Up
A budget is a plan you outline for your money and resources so that you can manage your spending, achieve your financial goals, and have enough money to last you until your retirement. It can also be called a surplus plan, a savings plan, or an emergency fund. The purpose of a budget is to provide you with a plan for how to spend your money so that you have enough money to cover all of your expenses and still have a comfortable monthly income.
2 thoughts on “Effective Personal Finance Budget To Save Your Money”