How to Create a Personal Budget: Tools & Examples

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  • 0:03 What Is a Personal Budget?
  • 0:33 4 Steps
  • 3:12 Budget Example
  • 4:42 Lesson Summary
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Lesson Transcript
Instructor: Tara Schofield

Tara has a PhD in Marketing & Management

Creating a personal budget doesn't have to be overwhelming or discouraging. There are four basic steps to create an effective budget. This lesson will walk you through the steps to create a solid budget.

What Is a Personal Budget?

Just like companies need a budget, individuals need to have an understanding of how much money they're earning and what their expenses are. A personal budget is an analysis of income or money available and how that money is spent. In creating a personal budget, it is important to establish a savings and donation plan. Additionally, it is important to evaluate expenses and understand which expenses can be decreased, if necessary. To create an effective budget, there are four key elements.

4 Steps to Creating a Personal Budget

Step 1: Know how much money you have.

You need to have a clear understanding of how much money you have available before you can determine how to spend the money. All too often, people look at how much is deposited on payday or what amount is written on their paycheck. They assume they have that much money to spend. This type of money management causes people to live paycheck-to-paycheck without having a plan to effectively manage their money.

The first step to creating a personal budget is to have a clear, definite amount of money you earn. This can be challenging if your pay amount changes or varies. If that is true for you, look at how much you have been earning and make adjustments for any changes. For instance, if you typically earn $500 a week but you just received a raise and expect to earn $600 a week, that's the amount you'll put in your budget. Likewise, if you have been earning $500 a week but think your hours will drop and your pay will decrease to $400 a week, you will use $400 a week income to create your budget.

Step 2: Determine a savings and charitable donation amount.

Every expert will tell you to pay yourself first. However, establishing the amount you want to put in savings and the amount you want to contribute to a charitable or religious organization is important. If you were to make this the fourth step, it's probable there wouldn't be any money left. It is critical to put some money into savings with every paycheck, even if the amount is very small. This habit will allow you to build security and have resources available in case of an emergency or unexpected financial need. In a similar manner, giving to an important cause helps you gain greater self-control and generosity and also changes how you view money.

Step 3: Determine the essential expenses (needs).

Within each of our lives, there are non-negotiable expenses that must be paid. These types of expenses include mortgages, car payments, utilities, set fees, and monthly expenses. It also includes food, clothing, household repairs, and other necessary costs that may not happen every month but need to be considered and included in the budget.

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