A personal budget is a finance plan that allocates future personal income towards expenses, savings and debt repayment. In other words, it’s a plan that sets out how you’ll spend and save your money.
This definition of a personal budget makes three important distinctions:
Firstly, this is a personal budget. Its purpose and form is quite different to the budget you create for your business.
Secondly, your personal budget is not just something you create and then a tuck in a bottom drawer, it’s an actionable plan that, if followed, will help you achieve financial and lifestyle goals.
And lastly, your personal budget is forward facing for a 12 month period and is broken down into months. It allocates your future personal income, including salaries, drawings and dividends from the business, towards personal expenses, savings and investments, and the reduction of personal debt.
Some people hear the words ‘Personal Budget’ and think restriction, limitation and confinement. They imagine having to cut all spending and live on bread and water.
Instead, think of it as your spending plan. By planning how you’ll spend your money, you’ll feel liberated and be able to spend guilt free, knowing money has already been set aside to cover your expenses. By putting a plan in place, you’ll no longer feel like you’re going to run out of money before the end of the week or month.
So, how do you prepare your personal budget? It’s easiest to start with a template. Either an Excel spreadsheet, an app or a website. Your budget should be set up for a 12 month period, with all income and expenses broken down on a monthly basis. We have a complimentary Personal Budget template available to our clients.
Ensure that your budget contains the following components:
1. Income. This includes business drawings, salary/wages, interest, dividends, rental income, and any other income you may receive on a monthly, fortnightly or weekly basis.
2. Expenses. Expenses should be split into key categories, e.g. household, food, apparel, children, medical, insurance, transport, lifestyle, and debt repayment. Irregular expenses such as annual rates or insurance payments, school supplies and uniforms, or holidays, should be allocated to the month they’re paid. This allows you to plan for those months you’ll have higher outgoings than normal.
3. Monthly Cash Summary. This should show your cash surplus or deficit for each month as well as for the year. If your budget has resulted in a deficit, review your expenses and identify areas to reduce your spending.
4. Actual vs budget. You should be able to easily compare your actual monthly spend to your budget. Set aside time each month to input your actual figures and reset your budget for the remaining months if necessary.
The key to a successful budget is to be completely honest about your spending habits. It’s best practice to review your bank statements to analyse your current spending. Inputting this information into the budget may be an eye-opener, but it will help you understand where your money goes and allow you to make adjustments. Even small adjustments add up over time.
The budget should be personal to you and your family and should reflect your overarching family goals. Your goal may be to reduce debt by spending less on lifestyle expenses. Or maybe you want to take a family holiday, so you reduce your food spend.
The key to achieving your financial goals is to understand where your money goes and develop better control over your money. Making a plan for your money and setting personal wealth goals will ultimately result in more money and less stress.
“A budget is telling your money where to go instead of wondering where it went.” – Dave Ramsay
Pathfinder Solutions can help you develop your personal and/or business budget. If you’d like to know more, please do get in touch.
About Pathfinder Solutions
Pathfinder Solutions advisory team members have either owned or managed businesses, or are investors themselves, so we know first-hand the challenges you face in your world.
Sure we’re Accountants, but the best solutions in business come from focusing on more than just the numbers. Our real-world business experience delivers just that.
