Personal Financial Budget and Steps for Create a Personal Finance Budget

By: EconomyWatch   Date: 30 June 2010

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Personal Financial Budget is nothing but a financial blueprint. Just as the blueprint would guide the builder and help him forecast the end results, the personal financial budget is mandatory in planning for the future and gathering financial security, independence and wealth. The personal financial budget not only plans money that comes in and money that goes but also keeps track of spending avoiding thereby to fall in the debt trap.

There are six steps of creating a personal financial budget:
  • One should determine his disposable income i.e. Income minus the deductibles like income taxes, union dues, pensions etc. the resulting figure can be written on a paper as value A. this calculation is not that easy. One may be paid more than once in a month. In that case proper calculation of the monthly salary should be made. The other sources of income like alimony, interest payment and child support should be included.
  • One should list the fixed and variable monthly expenses. Expenses in utilities should be broken down into expenses in electricity , gas and water. Appropriate amount of funds should be allocated for clothing, medical care,child care, personal expenses, recreation. A contingency fund should always be maintained in case of emergencies. Annual, quarterly and semi annual expenses should be split to obtain a monthly figure which can be used to pay for the bills that are pending. All such expenses should be added up and named value B.
  • Next the discretionary income should be calculated which is the total income less the total expenses i.e. Value A-Value B. this difference will be named as value C.
  • Next , one should list all monthly debts like credit card bills and other monthly payments. This value should be named as value D.
  • In this step one should find out whether there is any remaining discretionary income after deducting value D from value C. in case this value is negative then there is no point going to the next step but instead consult a personal financial advisor.
  • In the next step one should list in the short term, long term and undesired goals. The long term goals include, real estate purchases, investment for future education and retirement investments. Short term goals include investments for house renovation,new car, and travel. The other investments are in stocks, bonds, Mutual Funds. After determining these goals one must calculate how much he needs to save monthly to satisfy these goals after splitting the money required to satisfy each goal.

Nowadays formulating the personal financial budget has been made easy by the use of budgeting softwares available in the internet.




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