Personal Budget

What is a personal budget?

I treat my personal budget in the same way I would for a company budget. 

I think everyone should have one regardless if they are planning on saving or repaying debt, otherwise how do you know where you are?

How do I create one?

Firstly create a personal profit and loss report.  This is done by listing your income (excluding tax’s) and then your expenses (all of them don’t leave any out).  The difference between your income and your expenses is your profit or your loss ie you have spare money (theoretically) or you are spending more than you can afford.

Now a little tip for this would be to also include larger items that happen annually for example a holiday or car insurance.  Include these items in you budget but divide them by 12.  This value is the amount you need to save each month in order for them to not give you a negative impact in one month each year.

The next thing to do is to create a personal balance sheet.  On this you need to show your debt (all of it), and your savings.  I do mine for a full year so I can see in 12 months where my savings should end up.  This balance sheet will basically now hold the balance of your accounts each month.

Another tip, if your sad like me and are curious to know how much your worth add in the value of your home and other assets and total the value of your assets (property, savings) and your liabilities (debts) the balance will show if you are in positive equity ie your value is greater than zero or negative equity (your balance is less than zero).

What do I do now?

Now you can analyze your financial position and decide on the best course of action for you.

For example you may like me want to have a savings cushion I have 3 months wages saved up and have given myself a rule that if the savings pot drops to 85% of my the total of my 3 months wages I stop trying to repay the mortgage and refill the savings cushion.

What!!!!!  Say 3 months salary equal’s £6,000 I save £6,000, if my savings drop below £5,100 (85% of £6,000) then I top it up to get back to £6,000.   This is my emergency fund.

You may also decide to repay debts and strip out some of those non essential expenses.  If you are going to tackle debt always go for the most expensive debts first ie credit cards, overdrafts and personal loans.  My preference would also be to repay these before creating that savings cushion.

I will eventually try to add a downloadable budget planner as soon as I get a chance (and work out how you do it).