Planning a Personal Budget

A personal budget is a finance plan that allocates future personal income towards expenses, savings and debt repayment.

Importance

A budget should have a purpose or defined goal that is achieved within a certain time period.The more complicated the budgeting process is, the less likely a person is to keep up with it. The purpose of a personal budget is to identify where income and expenditure is present in the common household.

Flexibility

The budgeting process should be flexible; the consumer should have an expectation that a budget will change from month to month, and will require monthly review. Cost overruns in one category of a budget should in the next month be accounted for or prevented. For example, if a family spends $40 more than they planned on food in spite of their best efforts, next month's budget should reflect an approximate $40 increase and corresponding decrease in other parts of the budget.


Budgetting in case of irregular income

Special precautions need to be taken for families operating on an irregular income.People with an irregular income should keep two common major pitfalls in mind when planning their finances:

Spending more than their average income, and
Running out of money even when income is on average.

Allocation guidelines

**The 60% Solution

The 60% Solution suggests on spending 60% of a household's gross income (before taxes) on fixed expenses. Fixed expenses includes federal, state and Social Security taxes, insurance, regular bills and living expenses- like food and clothing, car and house payments.

The other 40% breaks down as follows, with 10% allocated to each category:

Retirement: Money set aside into an IRA (Individual Retirement Account).

Long-term savings: Money set aside for car purchases, major home fix-ups,or to pa down substantial debts.

Irregular expenses: Vacations, major repair bills, new appliances etc.

Fun money: Money set aside for entertainment purposes.

*Another allocation principle is that housing expenses (mortgage or rent) should be limited to 25% of spendable income.