How to create a personal budget in 5 steps

The ultimate guide to budgeting

• How to monitor your personal budget: 12 helpful tips
• How to create a personal budget in 5 steps
• Is there a good time to create a personal budget?
• Features of a good personal budget
• Introduction to budgets: Why you need a personal budget

You know why you need a budget, what you need to consider, and the best time to start creating your budget. It’s time to get started, this post tells you how to create your personal budget in 5 steps. Let’s get started!

Step 1- Decide your goals and budget approach

Set your goals

This is a very important aspect of creating your personal budget because the starting point of financial stability and success is goal setting. If you are preparing your budget before the start of the next year, plan for a lot of reflection and thinking time. The following youtube video by The Humble Penny on their 9 financial goals for 2020, provides a good example of goal setting from a family point of view.

Decide a budget approach

What is your mindset for budget planning? Do you want to do greater things with your budget? There are several philosophies on managing spend and budget. You can adapt one or formulate yours. The following are 2 examples of budget approaches:

The pay yourself first strategy

This is coined from the book, “The Richest Man in Babylon” by George Clason. The story is about Arkad a rich man who shares some lessons with friends on how to build wealth. One of the lessons was “A part of all you earn is yours to keep, it should not be less than 10% and should be more if you can afford it”.

The discovery made by Algamish in the story was that he could live on 90% and was no shorter on funds. He found he could manage without it. You can get the book here if you want to read the whole story. If you are a Christian and give 10% already, you will be used to living on 90%. Using this strategy, put a further 10% or more if possible away for savings/investments and then allocate the 80% to needs and wants as necessary.

The 50/30/20 rule

This is a strategy from Elizabeth Warren and Amelia Warren Tyagi’s book “All Your Worth: The Ultimate Lifetime Money Plan”. You can find a good review of the 50/30/20 rule on Investopedia. In summary, the 50/30/20 recommends spending 50% of your after-tax income on needs, 30% on wants, and 20% on savings and investing.

It is best to reflect on your situation to decide on the best strategy to adopt. You don’t have to apply any of the above but you should decide on the strategy that helps you meet your goals, and be flexible enough to adapt and change this as your circumstances and goals change. It might be necessary to adopt an aggressive strategy that requires saving a high percentage of your income if you have big goals.

Step 2 Decide on a budgeting tool

The second step to create a personal budget in 5 steps is choosing a budgeting tool. After you have decided on your goals and budget strategy, you need to decide on a budgeting tool. I believe the method you choose is as important as the budget itself. So choose something you are comfortable with and find easy and simple to use. It should make budgeting easier and not a chore.

• Note pad– if you still love having everything written on good old paper, you can set your budget in a notebook. This can be a traditional notebook or a budget planner.

• Spreadsheets– As an accountant, spreadsheets are my forte. Microsoft Excel has been much easier to use with each update so even if you are not an excel guru you can still use a spreadsheet as the main formula you will need is to sum. Download my free budgeting spreadsheet below;

• Apps– here is a good blog post that gives a good summary of budgeting apps in the UK. I have downloaded the money dashboard for a while now and not gotten round to using it. I will post a review when and if I do. Apps are great for consolidating all your finances and will provide a good overview.

Step 3 Make a list of all your expenditure

If you are using a notebook or spreadsheet, get your bank statements ready and make a list of all your expenditure in different categories. If you have downloaded my free spreadsheet template, you can add or delete expenditure items that are directly related to you. Be aware of the difference between needs and wants.

Step 4 -start building your budget

Add income from various sources and all the expenditures you have listed above into your budgeting tool by categories. Apply your budget strategy, and allocate funds to your savings, giving, needs, and wants.

Step 5-Check the bottomline and review if necessary

Check the difference between your income and expenditure. Take action based on the results.

• If Income = Expenditure: Fantastic! can you challenge yourself a bit more? Is your budget reflective of your goals? Are there changes you need to make in the long term to spend less? For example move to a more affordable area in order to follow a 50/30/20 strategy, thus keeping needs to 50%?
• Income > Expenditure: consider adding more to your savings or emergency fund as per your budget strategy and goals.
• Income < Expenditure: review and reduce expenditure first in the want categories for example; eating out, cinema, travel, and so on. Also, consider the long-term changes needed to bring your finance to the second state where income exceeds expenditure.