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Who is ready to learn a little bit about creating a personal budget?

Sounds boring, right?

Many people find budgeting extremely boring, including myself.

So… I have a confession…

I HATE budgets! Can you relate?

I don’t think I’ve ever had a discussion with someone who gets excited about creating a personal budget, sticking to a personal budget, talking about budgets, or really anything about personal budgets!

But please don’t stop reading! I’ve got good news for you!

I have a simple way to create and stick to a simplified personal budget, in a way that gives you the freedom to make the purchases that you want to make, and the freedom to feel like your personal budget is not going to suffocate you!

First, what exactly is a personal budget?

What is a personal budget?

Put simply, a personal budget is an estimate of your personal income and expenses. That’s it!!! It is really that simple.

A personal budget is a simple outline of the income that you bring in and the expenses that you need to pay.

A personal budget gives you a basic structure of where you should be spending your money each period.

Generally, budgets are broken down by month, but depending on how frequently you are paid, it may be better for you to break your budget into a different time frame (such as every two weeks). Whatever works best for you and your situation!

Now that we’ve outlined what a personal budget is, we can start diving into created a personal budget.

Keeping track of your personal budget

I like to use spreadsheet templates to keep track of my personal budget. They are simple to use and easy to follow along. By using these templates, it allows you the ability to effectively manage your budget in one simple area. There are numerous options to chose from, so find one that fits your needs and run with it!

The key here is to choose a system that works perfectly for you! There are a ton of different methods to keep track of your personal budget, and I go a lot more in-depth regarding different methods you can use for your personal budget here .

To keep this article simple, I’ll stick with what works for me, but please use whatever budget system will work the best for your specific needs, and that you’ll actually be able to stick with for the long haul!

Calculate your monthly income

This sounds like it should be common sense, but the first step in determining your budget is to figure out how much money you bring in every month.

If you’re paid weekly, simply multiply your weekly take-home pay by four.

Keep in mind that this will leave you with four extra weeks of pay for the entire year, but that’s ok!!

A budget is an estimate, and there’s good news, you can use those four extra paychecks for a variety of items over the course of the year, but more on that later!

Along those same lines, if you have an hourly job and your pay varies a lot from one week/month to the next, then take a look at your last year of pay stubs and figure out your lowest month. Build your budget based on your lowest month of pay.

This way, you’ll never be short with a balanced budget, and you’ll be able to use the extra money in months where you work more hours to put toward your financial goals!

List your monthly expenses

What are expenses?

Since this is a beginner’s personal budget, we’ll keep it simple.

Expenses are all of the bills that absolutely need to be paid every month.

These expenses can include things such as mortgage/rent, utility bills, car payment, insurance, groceries, gas, student loans, etc.

I won’t list every possible expense because we’d be here all day, but you can lump pretty much any bills that you have to pay every month into this category.

Here is an example of how your expenses should be listed. Include what it is and how much it costs.

Rent: $1,000

Car Payment: $250

Gas: $50

Electric: $100

Car Insurance: $100

Student Loans: $250

Groceries: $500

I could go on, but this gives you an idea of how to list out your monthly, fixed expenses.

Again, if you’d like a more detailed version, where I split our fixed and variable expenses, check out this post !

Figure out your discretionary income

This is a pretty simple step.

Simply take your total monthly income and subtract your monthly expenses.

This will give you the amount of money that you have left over to apply toward your financial goals and other items (like having fun). Side note: If your number is negative, don’t panic! You’ll need to do a little work to either increase your incoming income or to decrease your monthly expenses.

If you’re looking to increase your income, check out how to earn some extra cash !

If you need help cutting your expenses, check out this great post by the Finance Twins that will help you free up some room in your monthly budget!

Decide what to do with your discretionary income

This is an area where I believe many financial wizards become too constrictive in their budgeting.

Remember, I like to keep things simple.

It is important to determine what your financial goals are and to work toward those when creating a budget.

However, I am a firm believer that it is also important to have fun and enjoy life!

You do you! Have fun, be happy, and crush your financial goals all at the same time!

Your discretionary income can be used for a wide variety of items.

Below are some examples of what to do with your discretionary income:

PAY OFF DEBT!

If you have debt, especially credit card debt, I highly suggest making this your main goal. The more debt you are able to pay off, the more financial freedom you will give yourself.

And more importantly, you’ll have more money in your pocket instead of paying interest to the bank!!!

Save for Retirement

Saving for retirement is extremely important and is something that should definitely be on your list of things to focus your time, energy, and resources.

Unless you want to work until you die. In that case, don’t save anything. (Totally kidding and sarcastic here if you didn’t catch that!)

Build an Emergency Fund

My friend Melissa has a great post on why you need an emergency fund .

The truth is, things happen that we don’t expect. Cars break down. The washer craps out. The roof leaks. Etc, etc, etc.

I could literally go on for days about all of the unexpected things that could possibly happen and flip all of your hard work upside-down.

So, take the time and build an emergency fund so when life’s little surprises come to visit, you won’t be scrambling!

Save up for a large purchase

Maybe your car is on the fritz and you know it’s only a matter of time before you’ll need a new one.

Don’t finance it… instead, plan ahead, save some money, and pash cash for a good used vehicle. Here’s why!

Whatever large purchases that you know you’ll be making, take the time, plan ahead, and save up the money so that you can pay cash.

If you’re terrible at saving, check out this really easy way to save $1,000 in a year .

HAVE FUN!

Use your discretionary income to do the things you enjoy!

Go out to eat once in a while.

Hit the links for some golf!

Take your spouse to that concert.

Whatever interests that you have, this is where you can splurge a little bit. The keyword here being little. Don’t overspend and be responsible!

Treat yourself!

Buy that extra coffee or ice cream! Similar to having fun, but sometimes these little treats can be a great way to keep you motivated and reward yourself for a job well-done.

Just don’t over-do it and start buying that $5 coffee every day or you’ll be throwing away $1,825 over the next year!

This list could be endless, so use your creativity, set your individual financial goals, and stick to them.

For those of you that prefer to be more scientific and specific with your discretionary income, once you determine where you are going to spend this money, feel free to add these items as categories to your expenses. For example, eating out, entertainment, etc.

However, in my opinion, having the financial freedom to be able to be flexible with your discretionary income gives you a much better sense of freedom and makes it much easier to stick to your goals without going off budget.

Maintain and monitor your personal budget

This is a much more difficult step than most people realize.

It’s probably the hardest piece of a personal budget and perhaps one of the many reasons why only 30% of Americans use a personal budget!

Once you have your budget set, you need to maintain it every month.

Keep track of how much you spend on each of your expenses every month.

For example, let’s say that you have $500/month budgeted for groceries. After keeping track of your grocery expenses for three months, you determine that you are actually spending $750/month on groceries.

You are going over budget by $250!!! No bueno!

You can either choose to take steps to reduce your spending and bring this number down to your budgeted amount, which is the option I would recommend, or you can increase your monthly budgeted amount for groceries. Keep in mind that this will lower the amount of discretionary money you have each month, so decide carefully!

Keep track of what you spend in each category and adjust your budget and spending appropriately each month!

Final Thoughts

Remember to stick to your goals.

Did you set a goal to pay off all of your credit card debt with your discretionary income? Keep track of this so you can monitor your progress.

If, after 3 months, you haven’t paid any extra on your credit cards, you probably aren’t managing your discretionary income the way that you intended.

If you’d like a more comprehensive guide to budgeting, check out my step-by-step guide to creating a budget .

Tell me in the comments below how you like to manage your personal budget!

Good luck and happy budgeting!

-Real Money Robert

P.S. If you are faced with an emergency situation like losing your job, it might be a good idea to freshen up that resume so you can keep your personal budget on track.