One of the best-kept secrets to financial freedom is excellent personal financial management. Begin your step to financial freedom through building a feasible easy-to-follow personal financial budget.
1. Understand financial money management through budgeting.
What is financial budgeting? It’s all not just about tracking expenses. A real personal financial budget also deals with your income and even savings.
A good budget plan sets out: income less savings equals expenses. Many financial experts encourage this since it compels you to keep a portion of your income as savings: ie pay yourself first before everyone else gets part of your money.
They also recommend you save between 8 and 10 percent every month, though you can save more or gradually increase the percentage.
2. Discuss personal finances with the rest of the family members.
As much as possible, the budgeting process should involve the entire household, especially your kids, since it affects them too. Being involved as early as now also teaches them how to make wise personal finance decisions later and encourages them to appreciate the value of money and hard work of their parents.
Your spouse, on the other hand, is your best ally in keeping track and maintaining a good budget.
3. Determine the sources of income and expenses.
In general, there are two main financial money factors that comprise a budget: income and expenses. With income, there’s active and passive. The main difference between the two is your active income involves selling one unit of time for a unit of money, be it an hour, day or year – you are selling your time for an income stream. Otherwise, you don’t earn anything. Passive income, meanwhile, grows over time—sometimes exponentially—with very minimal effort in comparison. Although an often misunderstood part of passive income streams is that they can actually type quite a lot of time and energy to set up, but over time you are not selling a part of your time for a unit of money. Some of the popular passive income methods are mutual funds, certificates of deposits, savings account in banks, stocks, interest and dividend income, and online businesses.
Expenses can also be classified into two groups: variable and fixed. Fixed expenses are those with regular repayment terms, such as mortgages, auto loans, and credit cards. They, more often than not, are also amounts that don’t change month to month. Variable expenses, on the other hand, are those that can vary each week or month , such as entertainment, clothing, and other miscellaneous expenses. They, although not always, tend to be more discretionary in nature.
To learn how to manage a budget, list down all your sources of income and expenses and classify them based on the income and expense classes we mentioned a while ago. To help you identify your variable and fixed expenses effectively, refer to old receipts, bank statements, credit card statements etc. And remember the old 80/20 rule; 20% of the spending areas are going to probably consume about 80% of your money. So you don’t need to fine tune the analysis down to the last dollar, but far enough so you can work with it on a weekly/monthly basis.
4. Create a budget.
A budget can be as simple as summing up all your sources of income, deducting the amount you wish to save, and then allocating the balance to your specific fixed and variable expenses. For ease and quickness, use Internet- and mobile-based programs.
Keep your financial budget understandable and flexible, so it can easily accommodate potential changes in your personal financial situation. It has to work for the priorities in your life.
5. Keep track of the budget.
Assess and track your personal financial budget to know if it’s working. The only way to do that is to track it on a regular basis. Set aside some time each week, rather than leaving it to the end of the month. Compare your actual income and expenses to those of your budget. Refer to your documents such as credit card statements to know how much you’ve actually paid to your debts.
Maintaining a budget is hard. So many factors can ruin it. But by keeping your sights on your goals makes the challenges become more manageable.