personal budget

Do You Need a Personal Budget?

enter site For some, budgeting just comes naturally.  You are realistic about how much income you make. And you are innately disciplined in understanding how much of that income you should be spending. You are essentially able to maintain a personal budget in your head at all times. But for others, the lack of these natural abilities can ultimately result in financial hardship.

For such individuals, there is a disconnect between how much they earn and how much they should spend. Spending more than you make will prevent you from building wealth. You will not have the ability to meet your financial goals. This may include saving for a secure retirement. Or it may be saving for your children’s education.

Financial disarray can bring about other problems as well. It is well known that one of the top reasons couples divorce is financial issues. And financial issues and family problems result in stress.  And what does stress bring? Health issues. And health issues exacerbate financial problems.

A Personal Budget Can Help Anyone To Track and Improve Their Finances

After all, governments have budgets. Businesses have budgets. Why shouldn’t individuals have budgets? Finally, a personal budget is not only for the wealthy or the poor. It can be a solution for anyone. For example, if your annual income is $800,000, you are among the top earners in the country. But if you spend $900,000 each year, you have a problem.

However, a personal budget can help even those who already have spending under control. You can become even more disciplined and save even more. A budget can help you to meet existing as well as new financial goals. At the very least, it can prevent you from going into debt, or liquidating existing savings.

Income and Expense Analysis

So maybe now you have some motivation to at least see where you stand. Perform an initial analysis of income and spending. This will allow you to see where you may be going wrong. Bad spending habits may be uncovered with such an analysis. Make a list of all your recurring income sources. Then make a list of your recurring expenditures.

Note that recurring refers to items earned or paid each year not each month. So categories such as holiday shopping, birthday presents, back to school shopping, etc. should also be included. These items are paid a specific time of year. But they usually occur every year. These items are also very discretionary in nature. They are more luxuries than necessities. As such, there is much leeway here for cuts if you are having a though time meeting your overall budget.

Use Monthly and Annual Columns

For each list, include a monthly column and an annual column. The reason for this is that some items are estimated more easily one way or the other. So your telephone bill for example is paid monthly. This is an easy item to estimate on a monthly basis. But something like home insurance or auto registration may be paid on an annual basis. You know how much you pay each year, so you put that in the annual column.

Then you can go ahead and convert monthly items to annual and vice versa until you fill in every expense category. There are also other items which may be paid quarterly or irregularly. You can use credit card summaries and bank statements to figure a monthly or annual total. For something like property taxes, you can even look at your tax return. If you itemize deductions, the number should be listed on schedule A. Of course you may also track your income and expenses with software. This may make the analysis a whole lot easier.

Having both monthly and annual columns has another benefit. It provides you with multiple perspectives on both your income and expenses. For example, most salaried employees know immediately how much they make per year.


So if your expenses and income are both say $60,000, you know something needs to change. Having an annual total of your expenses available, you may say “$60,000 per year is not enough.” I need to make $70,000 to meet my financial goals. Alternatively it may be easier to analyze certain things on a monthly basis. It really depends on the individual, their preferences, and how they earn and spend their money. In the end, you should look at things both on an annual as well as a monthly basis. This way you will have multiple perspectives into your finances.

Add a Percentage Column for Better Vizualization

It is also helpful to add a “percentage” column. This column will include the percentage of each item divided by your total income. For example, you may have property tax outlays of $5,000 per year. Your income is $50,000. So you would enter 10% for the property tax line item. This can help you visualize better how much of your income you are spending on specific categories of expenses.

Below is an example of an income and expense analysis worksheet.


Use Software or Do It Manually

Niche software is preferable. Programs such as Mint and Quicken are great for ongoing tracking, printing reports, and even helping you to prepare your income taxes. These programs also have many automation features such as transaction import. So you do not have to do all the data entry yourself. But you can also do this with relative ease with a free spreadsheet application such as Google Sheets, or on the back of an envelope.

So whichever way you get there, you should have a monthly and annual column for both your income and expenses. Each column should have a total. Be sure to also add an expense category for miscellaneous. This can act as a small cushion for random one-time expenses which may pop up from time to time. This can include smaller items which do not warrant their own category.

Do You Spend Too Much of What You Make?

Now compare the totals of the income and expense columns. If your expenses total more than your income, you have a problem. Even if your expenses equal your income, you still have a problem. You cannot achieve your financial goals if you cannot save a portion of your income. Eliminating debt will be nearly impossible. You won’t be able to establish an emergency fund. Saving for retirement will be nonexistent. You won’t be able to save for your children’s education. And you can forget about buying that vacation home you always wanted. All this paints a relatively bleak picture.

You must be able to save at least 10% to 15% of your income. These savings should be allocated to meeting your financial goals. This can include any of the things mentioned above. You can pay off debt, save for an emergency fund, secure your retirement, etc.

How Can You Save More?

So how do you go about saving at least the recommended minimum? One way to do it is to increase income. You can ask for a raise at work, or find a higher paying job. Alternatively, you can find a part-time job to supplement your income. Another way is to cut expenses. For many, this may be easier than increasing their income. There is a reason people often gravitate to this second option. They realize that a lot of their income is spent on frivolous consumption. Things that they can easily do without.

So on the expense side, run through your column and see what you find. You will be surprised at what you see. You will no doubt find some cash disbursements which you can definitely cut back. Excesses can be in any category. It really depends on the individual and their interests. Maybe it’s an expensive hobby that is doing you in. It could be eating out too much. High grocery bills, cable bills, cell phone service, etc. Once you decide what you will cut, you have to hold yourself accountable. This is done with a personal budget.

Creating a Personal Budget

Again, whether its software or in a paper notebook, it doesn’t matter. The budget should have the same line items as your income and expense analysis. However, there is no right or wrong way in how you wish to set up your rows and columns in order to track your progress. You can have a separate page or spreadsheet for each month, or you can combine all twelve months in one place.

Also, you can include actual numbers and variance alongside the budgeted amounts, or you can create separate reports. Software programs will have their own style. But if you do it manually, the format possibilities are numerous. Just try to keep it relatively simple. For example, don’t add too many specific categories. Too much complexity will create stress and slow you down.

Sample Personal Budget

Below is an example of a simple personal budget.

You can find various templates online. Microsoft Office budget templates can be found here.

In the end, the objective is the same. You will have estimated targets you aim to meet (budgeted amounts), and actual income and expenses. You will need to somehow compare your budgeted numbers to your actual numbers on a monthly and year-to-date basis. This way you can track your overall progress. The difference between budget estimates and actual income and spending is called the variance.

Sample Budget Variance Report

Here is an example of a simple monthly budget variance report:

On the income side, a budget is an estimate of what you will earn over the next twelve months. This will include recurring income such as wages, dividends, interest, rents, etc. Let’s say your annual income is $50,000. But your annual expenses are $48,000. You decide that you want to save 15% of your income. Fifteen percent of $50,000 equals $7,500. Currently you are saving $2,000. So you need to save $5,500 more per year, or about $458 per month. Again, you can reach this goal by increasing income, cutting expenses, or a combination of both.

Cutting Expenses to Meet Your Personal Budget Goals

On the expense side, a budget is an estimate of how much you will spend. A better way of looking at it is how much (or little) you are promising to spend in order to meet your savings goal. Let’s say for example that upon your initial analysis, you determine that your $200 per month cable bill is way too high. You realize that you are paying for premium services which you don’t really need or use. Or maybe you enjoy them but you decide you will make the sacrifice.

Cable Bill Example

So you call the cable company and eliminate some of the services. Your cable bill will now be $125 per month. A much more reasonable amount. So you will plug this new number into your budget. This budget number should be easy to meet. You are relatively unlikely to just call the cable company back and add the extra services again. Using the example above, this will leave $383 ($458 – $75) of extra savings which you will still need to come up with each month.

Some Expenses Are More Difficult to Track

But other expense categories which you decide to cut back can be harder to track. They can also be more tempting each time you are faced with a spending opportunity. One such example may be shopping for clothing. You see a pair of shoes you just have to have. A few days later it’s a new suit, or a pair of jeans. Before you know it, your budget for the month is blown. At least for the clothes shopping line item.

More Drastic Measures May Be Required

Sometimes you may have to make bolder changes. This may include moving to a less expensive home or giving up a car. You may have to use mass transit at least temporarily. Or at least downsize to a cheaper and more fuel efficient vehicle. Alternatively, you may cut expenses to the bone and it may still not be enough. In such a case, increasing your income may be the only option left.

Use Your Personal Budget The Right Way

This is why you cannot just create your budget and put it in a desk drawer. Never to be seen again. You must check your budget regularly. At least monthly. If you see that you are not meeting your goals, you need to make adjustments. If you blow your budget in a specific category one month, make it a priority to meet the budgeted amount next month. Sometimes you may budget amounts you will never be able to meet. In such as case, you may need reanalyze and find other items to cut.

A budget should not be rigid, however. It should be flexible. For example, you can move unspent dollars from one category to another. What is important is that you remain within your budgeted amounts in total. Create a new personal budget each year. But include monthly totals and cumulative totals for the year. This way you can review it on an interim basis. Also don’t include too many expense categories. Too much detail can make it cumbersome to follow the budget. Finally, don’t add or change the categories often. This will help you in analyzing your progress over time more effectively.


A personal budget can help anyone to stay more financially focused and disciplined. It helps you analyze income and expenses over time. It can be take up some of your time and cause some stress. But following a personal budget is worth the trouble. The benefits should greatly outweigh the costs. You will get a picture of how much you make and how much you spend. You can see where most of your money goes, and how you can potentially cut back on certain categories of expenses.

A budget will allow you to determine what combination of increasing income and cutting expenses you need to reach your saving goals. You may feel that your quality of life will suffer if you make too many sacrifices to meet your budget. But this may only be temporary. Once you get your finances in order, you will reap the benefits. You will have more confidence, less stress, and will be on your way to maximizing your wealth potential.

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