How to Set a Personal Budget

“Money can’t buy happiness, but neither can poverty.”

Leo Rosten

Setting a personal budget can feel like a huge task to accomplish, however I’m here to argue that it can be pretty quick and simple with major life benefits. With basic tips you can start taking off into a world of financial freedom. Setting a personal budget will give you better understanding and control of your financial habits, give you the tools to prioritize your spending, assure you are saving for the big things you want in life, and give you peace of mind.

According to the Federal Reserve report about 40% of Americans could not cover a $400 emergency expense. The average American has about $3,500 in savings, according to a research study done by The Ascent: Motley Fool. That’s not great. At a minimum you should have at least 3 months worth of living expenses in savings. Needless to say, you are not alone if you are feeling that your savings account is not where it should be, but let’s work to get you there! The first step to making a great savings plan is creating a personal budget that works for you, so lets get right to it!

Setting a Personal Budget

Calculate Monthly Income

First, I recommend using Microsoft Excel for building your budget since you can type your categories and build formulas to calculate items as you go. Feel free to use Word, a Notes app, pen/paper, or whatever feels comfortable for you.

Now, the first step is pretty easy, write down how much you make on a monthly basis. If you are doing a budget with a spouse or significant other, make sure to write down both individuals monthly income.

If you do not have a standard salary, use an average of the last three months pay.

Calculate Monthly Spend

In order to set a budget, we have to know our spending history and patterns. This will help us find opportunities to save and prioritize what’s important in our financial life. Open up your bank account to see your daily transactions and determine what you are spending your money on each month. In your Excel budget template, write down the categories from the image below. Now go through your bank account line by line and put each spending transaction dollar amount into a category. You will do this for three months and if you’re doing this as a couple, make sure to add up both your expenditures. This may take a few hours, but feel free to work on it over a couple of days. Once you have put all your spending transactions into a category for the three months, calculate an average of your total monthly expenditures.

Feel free to add or remove categories that apply to your life. If you don’t give to charity, no ones looking, delete it. If you spend a lot on clothing, maybe it gets its own category. This is your personal file and no one will see it, so don’t worry about judgement and be real about your spending habits. This is a no shame zone.

Set Savings Goals

This is the fun part! I want you to write out everything you want now and in the future, think about literally everything, even if you’re not sure you really want it. Remember, no ones looking, so be honest with yourself. If you really want that cosmetic surgery, write it down. If you even think kids are a possibility, write down the savings you would want for them. If you always dreamed of a vacation house in Hawaii when you retire… write it down! If you don’t have 3-6 months worth of expenses in a savings account (emergency fund), make sure to add it.

Now, next to each item, determine WHEN you want to have this item and estimate how much each of those items could cost. You may want to do some research, if you have a dream car, look up average costs.

Now determine how much you need to be setting aside in savings each month in order to achieve your lifelong dreams. It will probably look like a lot, but don’t be discouraged, this will help you align where you are now with where you want to be. You can always start by prioritizing your savings items, an emergency fund (3-6 months of expenditures) is a definite first. This savings assures you will be okay if there is a loss of income for a time.

Finally, you need to open up some savings accounts. I recommend creating a Money Market (minimum $$ is required) and a Savings account. Nowadays, you can just do this with a click of a button once you open up your banks app. Your Money Market will be your untouchable 3-6 months emergency fund and your savings will be for whatever you have left on each paycheck after bills and necessities are paid. After each paycheck, simply do an internal transfer on your bank app from your checking account to your savings.

Once you get your budget set, your emergency fund put aside, and started your savings account, we can talk about investing. Here’s a great starter article called How to Invest Money if you think you’re ready for that next step.

Set Monthly Spend Goals

Now that you know where you want to go in your life with your savings, its time to look back at your expenses and see if we can help spare some dollars for those savings accounts you opened. First, spend some time reflecting on the exercise you did earlier where you wrote out all your spending habits for the last 3 months and put them into different categories. Write some answers to the questions below.

A basic spending rule to follow is the 50-30-20 rule, where 50% of your spend is for bills and essentials, 30% is for wants, and 20% is for needs. However, after assessing your savings goals, you may want to reassess these percentages. Can you cut your ‘wants’ back? Can you cut your needs/bills back by getting a roommate or a new quote on your insurance or internet, can you find a more affordable grocery store and start using coupons, can you start monitoring your heat/AC and electricity better? The more you can get into your savings the better – maybe even a goal of 50% SAVINGS –> 30% Needs –> 20% Wants.

Go back to your spending analysis and calculate what your current savings is (Monthly Income – Monthly Expenses = Savings). Now put each spending item into a category of Needs, Wants, and Savings and determine what your current percentages are. Finally, make some specific spending goals for yourself to help you achieve your savings goals. Write out at least 5 like the ones below.

Celebrate your Financial Freedom!

Congratulations! Taking over your personal finances is the first step to a life of peace of mind and financial stability. Taking control of your finances and where your money goes guarantees you are working to fulfill the life you want to achieve. Take a deep breathe and eat a celebratory snack for your hard work. Oh and set a meeting reminder for 1 year from now to re evaluate everything you just worked on.

&thenShe is here to help women take ownership of their health, career and lives.

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