Budgeting 101: The Complete Guide to Personal Budgets in 2020

Creating a personal budget is one of the simplest and most effective ways to control your financial future. If you are experiencing financial strain, or just want the relief of knowing that you have a plan, a personal budget could be the answer.

In this guide, you’re going to learn what a personal budget is, and why it matters that you have one in place. Then, you’re going to learn how to build a personal budget that can put you on your road to lasting financial security. 

What is a personal budget?

A personal budget is a monthly plan that you use to allocate your income toward necessities, luxuries, and savings. The purpose of developing a budget is to make sure that each of these priorities gets the attention it deserves 

These budgets can take many different forms, depending on the needs of the person who is creating them. Some budget plans are about aggressively saving as much as possible. Others are more moderate and designed to accommodate a lifestyle with reasonable luxuries.

You can develop a personal budget with tools as simple as a pen and paper. However, many people choose to use spreadsheets applications or budgeting software. These programs are widely available, and many of them are free.

You can develop a budget on your own or hire a professional accountant to help you create a tailored plan for your precise needs.

Why do I need a personal budget?

You need a personal budget to help you take complete control of your personal spending. 

A budget helps you do this in several ways. There are many benefits of budgeting, but some benefits are likely to matter a lot more to first-time budgeters:

Building a budget will help you:

  • Have a plan in place: Developing a budget allows you to have a plan that you can use to work toward your goals. The first one you build isn’t necessarily going to be useful, but once you have it on paper, you can start making adjustments. Just having the plan in place can start making you better at using it.
  • Prepare more effectively for financial emergencies: You never know when an economic disaster will strike. Medical bills, unexpected car or home repairs, and periods of unemployment can all cause financial hardship if you aren’t prepared.
  • Develop better financial habits: Applying a budget—and forcing yourself to make disciplined choices in order to keep it—will help you develop better financial habits. After you’ve spent some time using your budget, you’ll find it less challenging to stick to it. 

Budgets are important for everyone who needs to take their finances seriously. They are vital tools when it is time to start saving for retirement, but young people can also use them. 

A budget for teenagers may have different priorities, but it will still teach important financial habits. Now that you understand why you need a budget, you should consider what will go into it.

What should be included in a personal budget?

A personal budget should include all of your sources of income and all of your monthly expenditures. The point of being this complete is to make sure that you always know how much money you have to work with.

Building a budgeting checklist is an important part of making sure nothing gets forgotten. Make sure that your budget accounts for all of your costs, including:

Costs:

  • Rent/Mortgage
  • Utility payments
  • Car payments
  • Insurance policies
  • Groceries
  • Child care

Costs are only one part of a budget. The point of tracking costs at all is to allow for more long-term savings. A good budget will also include all of the following (when finances permit):

Savings:

  • Emergency funds (medical, vehicle, etc.)
  • Large purchases
  • Retirement

The costs associated with these needs can be significant. Budgets are popular and recommended by experts because they enable more effective saving. With a budget in place, you can manage these expenses by paying only a set amount each month.

Finally, your budget should track your luxury spending. While the word luxury is used to cover social outings, new devices, and entertainment, that doesn’t mean that all these costs are wasteful.

A budget isn’t worth much if it’s too miserable to keep. Make sure that you’re allocating enough money to your hobbies and desires to make the stress of sticking to the budget less painful. It’s wise to track all of the following:

Luxuries 

  • Treasured hobbies
  • Family vacations
  • Home improvements 

How do I create a personal budget? 

Even if you’re planning to create a budget using software or by hiring a professional, it starts the same way: To need to fill out what you’re taking in and what you’re spending. This part can be done with a simple pen or spreadsheet.

Create one column that covers all of your sources of income. Naturally, this will include your main job income and other sources from public programs, trust funds, passive income, or side gigs.  

Once you have that, you’re going to fill another column with all of your expenditures (including chosen ones such as the amount you want to save). Balance out these two columns to find your starting point. Do you have extra that you can save? Are you spending more than you’re making?
Once you’ve finished this work, you’re ready to learn how to create a budget plan. This is the framework that you’re going to use to accomplish all of your goals in the future.