Making a personal budget: Know the ins and outs

Thursday, November 8th, 2012 By

A piggy bank graphic depicting all the areas consumers should consider when it comes to making a personal budget.

A personal budget is necessary to keep finances in order. (Photo Credit: CC BY-ND/vanuk/Dreams Come True)

Making a personal budget is an essential element of being financially stable, yet 94 percent of Americans wish they were better at it, says the Financial Planning blog. Building a successful spending plan requires that all regular and semi-regular expenses are accounted for, yet people still tend to forget things that can sink a budget after the first couple of months. Here are a few critical points for every consumer to consider.

Budgeting for an emergency fund

Setting aside money for something that may never happen seems pointless to some consumers, but following the Boy Scout motto “be prepared” is a wise course of action. Certified Financial Planner Peggy Cabaniss of HC Financial Advisors suggests that having six months of living expenses (not gross income) socked away is a good idea, writes Banknote. Until that goal is reached, building the emergency fund should be a priority. Try having money transferred directly from your paycheck into an interest-bearing vehicle like a short-term bond, says Cabaniss. Don’t leave it in your checking account.

Saving for something big

After your emergency fund is complete, it’s time to start saving up for the big stuff. Whether it’s a vacation, car or down payment on a house, making a budget is necessary for big expenses. Separating the monthly allotment before it hits the checking account will help keep you disciplined. However, it is important to be realistic with your savings goals when planning for a big purchase. Don’t try to save more than you can handle by cutting essential expenses.

Remember recurring expenses

Make a mental checklist of all regular and semi-regular expenses, says CPA and CFA Barry Picker of accounting firm Picker & Auerbach.

“Invariably, something shows up that throws the budget into disarray,” he told Banknote.

Overestimating a personal budget is rare, but underestimating is common. Thus, review bank and credit card statements from the past year to see what you actually tend to spend in any one category. Using personal accounting software like Quicken or Microsoft Money can make this task easier. Common trouble areas when making a budget include utilities, lunch expenses, snacks, cell phone bills, insurance, auto repairs and clothing. If you’re buying clothes for young children, using resale outlets can free up a great deal of room in the budget.

Plan for the birthdays and holidays

Resorting to credit cards during gift-giving seasons is easy, but the financially smart consumer budgets cash ahead of time in order to save a great deal in the long run. Vice President of Public Relations Gail Cunningham from the National Foundation for Credit Counseling advises that consumers look at what they spent for Christmas and divide it by 10. That’s how much to put away each month through October.


Financial Planning

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