Creating a personal budget is one of the best ways we know to reach your personal finance goals. There’s a misconception that having a household budget is necessary only if you don’t have a lot of money. The truth is that budgeting can help you change your spending habits, prioritize saving, and be confident that you’ll have the money to pay for any unexpected expense that arises.
At Leaders Credit Union, we care about your personal finance goals and believe that it’s our mission to provide you with the tools you need to achieve them. When you understand budgeting basics, you’ll be able to create a monthly budget that will help you reach your goals. Here’s what you need to know about how to establish a personal monthly budget.
What Are the Key Components of a Successful Personal Budget?
Let’s start by reviewing the components of a personal budget. Simply stated, your monthly budget should include all of your expenses and all of your earnings. We’re big fans of using a zero budget, which means that every penny you earn is accounted for.
Income to Include in Your Budget
Any budget you create should start with your monthly income. You should include income from all sources, including the following:
- Regular employment income
- Self-employment income
- Regular investment income such as dividend payments
- Side jobs
By including everything, you’ll be confident that everything you earn is accounted for.
Expenses to Include in Your Budget
The other component of a monthly budget is your monthly expenses. Any monthly expense that you pay regularly should be included and we recommend having a category for discretionary spending as well. Here are some of the expense categories to include:
- Rent or mortgage payment
- Car payment(s)
- Utility bills
- Groceries
- Transportation
- Insurance
- Property taxes
- Loan payments, including student loans and personal loans
- Subscriptions, such as streaming services or software subscriptions
- Pet expenses
- Credit card payments
- Payments to yourself (savings goal)
- Discretionary expenses
One of our most important recommendations is to pay yourself first. It’s for that reason that we think you should include your savings goals in your monthly budget. We’ll talk more about that later.
How Can a Personal Budget Help with Managing Debt?
Debt management is a crucial element of budgeting. Your payment history is responsible for 35% of your (FICO®) credit score, and that’s something that will impact your ability to qualify for a mortgage or car loan.
If you’re working on paying down your debt, then having a monthly budget can help you stick to a debt repayment schedule. For example, you might be using the avalanche method to pay off debt starting with the debt with the highest interest rate. You can build your debt repayment schedule into your monthly budget to ensure you have the money you need to meet your repayment goals.
Keep in mind that paying down your debt can improve your credit score and help you meet your savings goals, too.
How Can a Personal Budget Help with Savings Goals?
As we mentioned above, we believe that paying yourself first is the best way to work toward your long-term financial goals. If you want to buy a home, travel the world, or have a comfortable retirement, saving money is essential.
Some of the savings goals you may want to work toward include the following:
- Creating an emergency fund
- Saving for a down payment on a house
- Saving to buy a new car
- Contributing money to a child’s education fund
- Saving money to invest for your retirement
Your personal budget can help you achieve your savings goals because you can decide how much to save each month and plan the rest of your budget around it. A common budgeting mistake is to make saving money an afterthought. What we mean by that is that if you save only what’s left over at the end of the month, you’ll have difficulty meeting your savings goals.
The alternative is to make discretionary spending the flexible category. When you prioritize savings, you may need to spend less in categories such as entertainment. The upside is that you’ll always be saving money and working toward your most important goals.
How Can Someone Start Creating Their Own Personal Budget?
Creating a personal budget isn’t complicated. Here are the steps you’ll need to follow to determine a budget that works for you.
#1: Calculate Your Net Income
Start by calculating your net income. You should include your income from regular employment, self-employment income, side work, and any other money you have coming in from any source. If you’re married, your spouse’s income should also be included. You may want to consider a household expense budget if you’ve got one or more roommates, too.
#2: List Your Expenses
Once you’ve totaled your net income, you should list your expenses. Make sure to include the items we listed above. It may be useful to review your bank or credit card statements since it can be easy to forget subscriptions and other recurring payments. For groceries, utilities, and other bills that fluctuate, you may want to use an average or–if you prefer to be cautious–use the highest amount you’ve spent as a baseline. This is also the step where you’ll calculate your debt repayment schedule.
#3: Determine Your Savings Goals
Your savings goals should be the next thing you consider because you’ll need to know what they are before you move to the next step. For example, if you don’t have an emergency fund, you might make that your first savings priority. If you have enough net income to do so, you may want to split out your savings goals into multiple line items. That way, you can keep track of everything.
#4: Review Your Accounts
We often recommend that our members have a separate savings account for each of their savings goals. This might seem like an unnecessary step but we find it’s easier to track goals when each goal has its own bucket. For example, you might want a high-yield savings account for your emergency fund, a Christmas club account for holiday savings, and a vacation savings account to save for your next big trip.
#5: Itemize Income and Expenses
After you’ve decided which savings accounts you need to meet your goals, it’s time to itemize each income item and expense on your budget. We recommend using a zero budget method where you account for every penny you earn. If you get to the end of the month and you have money left over, you can move it into savings.
#6: Review Your Budget Regularly
The final step is to make budget review part of your ongoing financial planning. There will be times when it’s obvious that your budget needs to be reviewed. For example, you should revisit your budget when you get a new job or a raise or if you experience a loss of income. We also suggest reviewing and revising your budget when you make a final debt payment or revise your savings goals.
What Tools or Apps Can Help with Personal Budgeting?
Finding the right budgeting tool can be a big help when you’re creating a personal monthly budget. While it’s certainly possible to use Excel or a Google spreadsheet to track your monthly expenses, many people prefer to have a dedicated budgeting tool to use.
At Leaders Credit Union, we have built a budget calculator into our free mobile app. With it, you can track your net income and expenses and link the whole thing directly to your Leaders Credit Union accounts to make saving easy.
Here are a few other budgeting tools and apps that you may find useful as you create a budget of your own:
- YNAB is a zero-based budgeting app that’s easy to use. The one downside of it is that it costs $14.99 per month, which may be more than some people want to pay.
- Goodbudget is an envelope-based budgeting app where users allocate an amount in each spending category and use only that amount each month. They have a free option and the premium option costs $8 per month.
- Everydollar is a zero-based budgeting app created by financial expert Dave Ramsey. There’s a free option and the monthly cost for the premium version is $17.99.
- Empower Personal Dashboard is a budgeting tool that allows users to create a personal budget to track spending and saving. What we like about it is that you can also use it to track investment accounts, including IRAs and 401(k) accounts. The app is free.
- Honeydue is an app that can be useful if you need to budget with a spouse or partner. It’s a free app that allows you and your partner to sync your accounts and create custom spending categories.
- Leaders Money Management tool is a budgeting featured that's free within our mobile app. Meeting your financial goals is easy with access to your accounts, budget, spending trends, debt repayment, and goal tracking all in one place.
There are many other apps and budget tools out there, so we suggest reviewing the options to choose the one that’s right for you.
Create Your Personal Budget with Help from Leaders Credit Union
Establishing a personal budget is one of the most valuable things you can do to help you achieve your savings and other financial goals. The information we’ve included here will help you understand the budgeting process and create a budget that works for you.
Do you help setting and sticking to a budget? Access our free Smart Budgeting Tool Kit and choose the budgeting and money management strategies that work best for your needs.
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