Planning a personal budget isn’t as simple as it may seem at first glance. You have to think it through carefully, and then spend the money according to certain principles. It’s hard, yes. And that’s why many people prefer to think of taking care of their personal budget as a completely empty activity, from which there are zero benefits.

However, that’s not the case. If you find a clear balance between income and expenses when forming your personal budget, you can organize your finances and start saving a certain amount for some expensive thing or just a “rainy day”. 

The Concept of a Personal Budget

What is a personal budget? It’s a clear, structured plan of your finances: income, expenses, savings, debts, etc., which should contain absolutely all the items of receipts and expenditures.

So why do you need to make this plan? Having all your finances written out and structured, it will be much easier for you to distribute your budget, plan your expenses, and calculate how much money will be left and how you will be able to use it properly.

With a clear plan, it’s much easier to achieve results, this also applies to finances. Seeing your goal and striving for it, you can refuse unnecessary purchases, unreasonably expensive goods, and habitual daily expenses, and instead set aside money for something more important.

Keeping a personal budget is the first step toward financial literacy and security. A study of millionaires in the U.S. found that about 90% of those surveyed said they were in control of their money even when they had an average income.

Many of them believe that this was the reason for their financial prosperity because by managing even a small amount of money, you can gradually create good capital.

There are three main types of personal budgets: frugal, balanced, and wasteful. They differ in the ratio of the percentage of income and expenses. Each person chooses the type that suits him, because all people have different needs, habits, nature, and other background data. But, in any case, keeping your budget is a very useful thing.

Also, Read This: How Can an Investment Calculator Help You with Financial Planning

Economical Type of Personal Budget

The name speaks for itself. With this type of personal budget, a large percentage of finances is allocated to savings. Expenses do not exceed 50% of total income. It isn’t always easy to live by this kind of plan; it requires serious self-discipline on the part of the person.

It’s necessary to keep a clear control of funds, not to go to great lengths, having received an income greater than usual. To save money, for major purchases, it’s necessary to set aside money in advance for some time or to use installments, to avoid large one-time financial losses.

Not everyone is always able to cope with the desire to spend free funds, so the best option in a frugal budget is all kinds of investments, to preserve and multiply them.

With such a life a person, on the one hand, feels secure for tomorrow, having a “safety cushion”, he is not afraid of losing his job and other unforeseen circumstances, and on the other hand he is under constant pressure from the need to control funds, limiting spending even on small everyday joys.

Balanced Personal Budget

This type is characterized by a large share of expenditures and an average share of savings. You can denote such a plan with the following numbers: 50/20/30. Where 50% is mandatory spending (rent, utilities, food, transportation, etc.), 20% or 30% is allocated for savings, and the remainder is either intended to pay for loans or is spent on optional purchases (entertainment, gambling at CasinoChan, hobbies, etc.).

This percentage distribution is conditional, and can change depending on various factors (e.g., an increase in wages, an increase in some item of expenditure). Balancing between a frugal and a wasteful kind of budget is hard, and sometimes a balanced kind moves off into one of them. It takes a lot of effort to create a sound financial plan and follow it.

The plus side of the balanced view is that there is a “safety cushion,” but much less than with the frugal option. The downside, however, is that it’s hard to plan and distribute finances.

The Wasteful Option

With this kind of budget, a person spends all his money without leaving a single penny in reserve. Such budgeting is dangerous. It’s possible to get bogged down in debts and loans, to lose savings, if any.

It would seem that there are only disadvantages to this option, but there can be a benefit: people who lead a wasteful life, worry less about their finances, have less control over them, wasting precious time and nerve cells.

Forming a Personal Budget Depending on Its Type

Depending on the type of budget a person chooses, the principles of budgeting also differ. When the budget option is economical, people plan only for the essentials, excluding all additional expenses if possible. If the plan is balanced, it also includes funds for entertainment and major purchases. In the prodigal form, everything is much simpler – finances are distributed exclusively on expenditures (mandatory and additional), with no savings and accumulation.

The choice of one type of budget isn’t something fundamental and immutable. Depending on various factors, a person can change his financial behavior and switch from one type to another.

If everything is carefully thought out and planned, you can not only receive income from the purchased property but also invest it, which will already belong to the economic type of budget.

The most dangerous option is to go to extremes (excessive wastefulness or total savings). If you save every penny by putting off purchases for later, that “later” may not come. With wastefulness, people risk not only losing savings but also becoming bankrupt and reducing their standard of living with the emergence of unforeseen circumstances.

The 4 Principles of Good Personal Budgeting

Have Long-term Financial Goals

A financial goal isn’t the same as a budget. It should include not only money but also your interests and dreams that you aspire to achieve. If you have not yet formulated your long-term goals, that’s okay, it’s never too late to do so. You can take your personal budget as a basis and gradually supplement it with meanings and ideas.

Make Sure Expenses don’t Exceed Income

There are two ways to do this. First: try to increase personal budget income (work overtime, look for sources of extra income, monetize hobbies, start investing funds, etc.), and second: if you can’t increase income, you need to reduce expenses.

Generate Multiple Sources of Income at Once

Once you’ve got your budget in order and learned how to set aside money, you need to move on to the next step, which is to make it work for you. There are special apps that help novice investor to take the first steps. For example, all kinds of piggy banks. 

Adhere to Cost-sharing Principles

There are three basic principles:

  • Pay yourself first. When planning your budget, determine at once the amount you feel you need to invest, invest, etc. And after that, distribute the rest of the funds.
  • When planning your budget, you should divide all of your expenses into mandatory and optional. You can’t postpone obligatory expenses and spend them on something else, and you can redistribute them in different directions in case of unforeseen circumstances.
  • An increase in income doesn’t necessarily mean an increase in expenses. Naturally, when additional funds appear, many ideas arise as to where to spend them, but there’s no need to rush into impulse purchases. Let expenditures grow more slowly than income. 

By following these simple principles, you can get your finances in order, and budgeting will not be torture for you.

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