The Personal Budget
The basic purpose of a personal budget is to plan how an individual’s money will be spent.
Given limited financial resources, a budget is a method of managing personal cash flow, to
meet current needs and save for the future.
Reasons to Prepare a Personal Budget
A planning tool: Correctly used, a personal budget can ensure that income and
expenditures match, both in amount and timing. It can both spotlight potential cashflow
problems, and identify opportunities to make better use of current income.
A yardstick to measure progress: By comparing the planned budget against actual
results, an individual can see if progress is being made toward meeting specific goals.
This measuring process will often highlight areas where changes should be made.
Preparing a Personal Budget
Past income and expenditures: This initial step entails recording information on past
cash flow, both income and spending. Ideally, a year’s worth of data should be
gathered, to even out the effect of seasonal variations. Paycheck stubs, check
registers, cancelled checks, copies of paid bills and recent income tax returns are
excellent sources of this information. An individual may also want to keep a daily
spending diary for a short period of time.
Set goals: Clear goals should be set, with both specific dollar amounts and a realistic
time frame for accomplishing each goal. A goal can be as simple and immediate as
making ends meet each month, or as complex and long term as planning for
Maintain records: Perhaps the most difficult part of the budgeting process is
consistently keeping adequate monthly records of income and expenditures.
Periodic review: A periodic review, comparing the planned budget with actual results,
provides a means of measuring progress toward an individual’s goals. The review will
usually indicate if changes should be made, either in income, expenditures or both.
National Spending Patterns
How does your spending compare with these broad national budget averages?1