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The Importance of a Personal Budget to achieve Financial Freedom

Wednesday | March 27, 2019
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A personal budget is a plan to help you in the use of money. The benefits of a personal budget are as follows:

1. It gives you the freedom to spend within the budget.

2. It promotes saving habit.

3. It shows you how to pay off debts.

4. It allows you to live with more confidence and less stress.

5. It provides a buffer or limit when emergency incidence occurs.

THE SEQUENCE OF STEPS TO CREATE A PERSONAL BUDGET

Step 1: You should know your monthly income from all sources. This is total income before deducting taxes. When you compute your total income, do not forget to include dividend, interest, tax return, etc.

Step 2: You should know your monthly expenses. You need to track all expenses, ask for receipts and record them using computer application, smartphone application or book. Married couples should do personal budget separately. Normally, there are two types of expenses, namely, fixed expenses and variable expenses. Fixed expenses are rent payable, insurance premium, etc. Variable expenses are foods, clothing, entertainment, etc.

Step 3: You should categorize your expenses. Each ringgit spent should be categorized in your personal budget. You can use one category called miscellaneous to record all monthly small random expenses. Your personal budget will not be the same monthly. Thus, you should record your expenses and adjust them throughout the month. If you know that your foods expense has exceeded budget, then you should reduce other expenses e.g. entertainment.

Step 4: Implementing budget. Your budget should be used as a visual guide on how you spend and where you have the freedom to spend. You should fix your objective when you record your expenses and control your money. This will allow you to adjust your expenses in order to achieve your objective. You should find the easiest way to do all these tasks. Some people like to use spreadsheet, pen and paper or cash in an envelope. Nevertheless, choose the method that is easy for you. You should determine how much to be allocated for each category of expenses.

Step 5: Comparison and reconciliation. Now, you should have a personal budget and follow your planned expenses. You should know which categories of expenses have cash surplus at month-end. Our objective is to ensure that income is always more than expenses. If you overspend, then you need to reduce your expenses in certain categories of expenses. You need to allocate time to evaluate and reconcile your budget in order to attain your objective. If you make mistake, then you can always make reconciliation and do not give up.

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