A Guide to Building a Personal Budget

Have you ever wondered where half of your paycheck goes, and it’s only the 15th of the month? You’re not the only one. Everyone works very hard for their money, but money management or saving money feels challenging. The truth is, personal budgeting is not all about self-control but rather self-empowerment. It’s about telling every dollar where to go to control your future rather than feeling controlled.

A successful budget is based on a positive psychological shift. It shouldn’t be a source of anxiety but a source of opportunity. We want to demystify the personal budgeting process so that it is attainable, practical, and ultimately bestows you with financial freedom.

Budgeting vs. Tracking

Often, individuals confuse expense tracking with proper budgeting.

• Tracking: It is defined as recording all money spent in a given month and is a review mirror.
• Budgeting: It is setting an allocation to each expense category for the upcoming month and acts as a roadmap.

In summary, expense tracking will tell you the problem, and budgeting will solve it.

Phase 1 – The Foundational Steps of Budget Building

Personal budgeting is a process; building a house without a proper foundation is a bad idea.

1. Calculate your net income: Net income is the money that is actually in your bank account after taxes and deductions. Set your budget with that number only.
2. Record your fixed expenses: These are bills that are roughly the same every month (e.g., Rent, Loans, Subscriptions).
3. Estimating Your Variable Expenses: Look back at three months to get a decent sample for expenses like groceries, utilities, and dining out.
4. Setting Aside a Budget for Irregular Expenses: These are expenses like yearly car registration or holiday gifts. Take the total amount of a yearly expense, divide it by 12, and set that small amount aside each month.

Phase 2 – Picking Your Budgeting Philosophy

There isn’t one optimal way to budget; the optimal way is what you will actually stick to.

• The 50/30/20 Rule: A simple framework: 50% for Needs, 30% for Wants, and 20% for Savings.
• The Zero-Based Budget: The aim is to have your Income – Expenses – Savings = 0. You have to give every individual dollar a job before the month starts.
• The Envelope System: A tactile, cash-based system often used for variable expenses. You place cash into physical envelopes; when empty, spending stops. This leverages the “pain of paying” to reduce impulsive spending.

Phase 3: Optimising Your Budget for Success

A budget is a living document that needs to be reviewed and adjusted regularly.

• The Power of the “Why”: Attach your budget to larger, positive goals like buying a home or travelling.
• The Art of the Budget Review: Review your budget bi-monthly. A mid-month check-in helps you see if you are on track, and an end-of-month analysis helps you adjust allocations for the next month.

Taking the Debt Issue with Determination

• The Debt Snowball: Pay the minimum on all debts, but put extra money into the smallest debt first for quick psychological wins.
• The Debt Avalanche: Focus extra money on the debt with the highest interest rate first; this is mathematically the cheapest route.

Afterword

We all strive to achieve financial freedom, but true financial freedom is attained when our needs are met comfortably and our wants are taken care of seamlessly. Like we have dopamine boosts when somebody validates our social media presence, having financial literacy and saving money gives you a higher dopamine rush.

At Billabong High International School, we understand the importance of finances and budgeting on young minds. Visit us to see our teaching modes and techniques for a 360-degree evolution of a young mind.