Module 05: Designing a Personal Budget

Topics to Be Covered:
 Budget
 Importance of a Budget
 Keys to Effective Budgeting
 Budgeting is Effective Money Management
 Creating a Budget
 Steps in Budgeting
 Practical Budget Tips
 Building Efficient Budget
 Summary
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Budget
A budget is plan for managing your money in a way that best meets your personal (and professional)
needs and wants.

Following a practical budget can help you:

• Develop better financial habits

• Relieve emotional stress

• Assist you in achieving your financial goals

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Why is a budget Necessary?

• Identifies and defines your financial goals

• Manages your money

• Directs your money flow

• Increase your savings

• Avoids spending money unnecessarily

• Achieves your personal goals

Seven Keys to Effective Budgeting
1. Identify and develop personal goals

2. Evaluate and record current trends, both income and expenses

3. Assign priorities

4. Develop a time line for the month

5. Keep it simple

6. Remain flexible

7. Review and revise

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Budgeting is Effective Money Management

• Effective money management is planning how to get the most from your money

• Good money managers keep track of where their money goes so that they can make it go farther

• Effective money management includes:

1. Developing personal financial goals

2. Organizing personal financial records

3. Creating a personal monthly budget

4. Evaluating personal financial health

Creating a Budget
Creating a budget begins with a clear, accurate and well though-out plan. This will allow you to be able
to:

1. Adjust plans, activities, and spending as needed

2. Spend money cost-effectively

3. Reach the specific goals you have set

4. Strengthen internal control system

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Contents of a Budget
• Income: Money earned or contributed to your household from either personal finances or a business.

• Expenses: Money that you spend, this includes anything you purchase. This includes both planned and
unexpected Expenses.

Steps in Budgeting
1. Set financial goals

2. Estimate your income

3. Record what you spend

4. Budget for actual and unexpected expenses

5. Review and evaluate monthly

 Set Financial Goals

 Identify and write them down

− Short-term (within a year)

− Long-term (1-5 years)

 Make them achievable, practical, and owned by everyone

− Keep them in the forefront

− Journal the process

− Celebrate their completion

 Write them into your monthly budget

 Adjust them as necessary

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 Estimate Your Income

 Make a list of each income stream that you receive on a regular basis each month. The key is to
only include that income you get every month.
 Include both monthly wages earned from your job(s) as well as monthly supplemental income.
(i.e. child support)
 Calculate the monthly income total.
 Record but do not include any periodic income you may receive at this point.
 If your income is unpredictable then estimate what you will receive in the next month and
adjust it down a little.

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 Record What You Spend
 Review the previous month’s check book ledger, bank statements, etc and record your spending
and income.
 Record what you spend for the next month and write down your actual expense income.
 Budget for Actual and Unexpected Expenses
 Actual expenses: Identify fixed expenses (i.e. housing – rent or mortgage; car – payment, up-
keep, gas;

insurance – health/medical, life, auto, home; food; household utilities; student loans; clothing;
entertainment)

 Record the monthly payment deadline and plan according to your pay date.
 Variable expenses: Identify recurring expenses that fluctuate (monthly grocery, automobile, etc)
and calculate an average based on previous months. Note: when in doubt, guess high!

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What Else Is in A Budget?

• Student loan payments

• Insurance payments

• Entertainment (movies, books, magazines, toys, cable TV, Internet access)

• Incomes taxes in addition to those withheld from your pay check

• Child care

• Medical bills

• Savings (transfers to savings account, retirement fund or brokerage accounts)

• Vacations

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Budget for Actual and Unexpected Expenses

1. The first step is to create and maintain an Emergency Fund.

2. Initially, the Emergency Fund should be £500-£1,000 depending on your income and debt load.

3. Eventually you will need to increase this to 3-6 months worth of income.

4. Develop a discipline this is only used for emergencies. (unemployment, unexpected medical needs or
financial crisis)

5. Should you have to use money in this fund for an emergency then the priority for the next month is to
re-supply the fund.
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Budgeting Terms
• Surplus occurs if you have a positive cash flow

• Deficit occurs if you have a negative cash flow

• Discretionary Income is the money you have left over after paying for essentials; it is used to evaluate
the strength of a person’s income; represents the money you can spend on wants

 Review and Evaluate

1. Review on a monthly basis especially when you begin the process

2. Evaluate the budget against your personal financial goals

3. Monthly deficits need to be addressed immediately

4. Surplus needs to be added to savings

5. Do not get discouraged

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Practical Budget Tips

 The budget must balance
 The income must equal the expenses
 If you have a surplus then it does not mean you must spend it – this is where a savings
account adds value
 Plan carefully
 Estimates should be based on some data
 Cover all expenses
 Be practical
 Be flexible
 Write your budget down
 Be able to access your budget data easily

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Building Efficient Budget
 A variety of resources are available to help you design a personal budget
 Consult with an advisor or representative at your bank
 There are free online tools, app’s and classes in the community (i.e. local library)
 Experience is a good teacher – ask for insights from family and friends and trusted advisors
 Think about your future and your family
 Marriage, kids, elder care
 Retirement
 Starting to save earlier than later is key to see the benefit of compound interest (“interest on
interest”)

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 If you are an entrepreneur, be mindful of separating work finances and personal finances
 Avoid co-mingling of funds
o Definition: the act of mixing the funds belonging to one party, especially when one party
has responsibility to keep the funds separate for the other party
 Budget to enjoy life and have fun
 “Quality of life” and work/life balance are key to good health
 When slips happen get back on the wagon
 Patience, Perseverance and Persistence are the 3 P’s to success
 Being disciplined and tracking your budget on a monthly basis helps form good habits on
managing your finances.

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