Wednesday, April 9, 2008

Financial Advisor: Personal Finance Budgeting

Financial Freedom Mini Series: Lesson 1

This financial freedom mini series is intended to help the average person gain a knowledge about that concepts of personal finance and help enable them to manage their own personal finances in a responsible way. If you are a first time visitor I suggest you go back to the previous post and catch up on all that this Financial Freedom Mini Series is about.

Okay, now that you are up to speed I want to get into today's lesson. The topic for today's lesson is Personal Finance Budgeting. The first step in becoming financially responsible is to begin with a personal finance budget. Without a personal finance budget there is no way one can possibly track their income and spending properly.

Before moving on to what personal finance budgeting is I want to explain why budgeting is so important. Okay, lets say you decide to start a new business. We will say a personal financial advising firm (just for the sake of this subject). When you start your personal financial advising firm the first thing you would do is plan out all of your expenses. Any person would logically set up a finance budget for their expenses before they began because without financial planning you would have no idea of whether our not your personal financial advising firm would succeed. The next step would be to plan out your expected revenues. Then you would take the difference between the two and see how the numbers came out.

This is exactly what personal finance budgeting is for a business and people should handle their personal finances in the exact same way. When making a personal finance budget it is important to include everything that involves your money. This includes all income and expenses.

A personal finance budget should include the following components in it (The components listed below are just a sample and many different ones can be found on the Internet). You can also find personal finance software on the Internet. You can find personal finance software that must be purchased and also free personal finance software. This personal finance software is made so that you can easily enter all your income and expenses and it does everything else for you.

The components included in a personal finance budget are both income and expenses. Examples of income in personal finance budgeting include job income, gambling winnings, capital gains, social security, tax refund, etc...

Examples of expenses in personal finance budgeting include savings, electric bill, health insurance, cell phone, groceries, books, shoes, clothes, car insurance, gas, entertainment, travel, miscellaneous. This expense list is my no means complete. Anything possible thing that you can think of that you might need to spend money on should be included in your personal finance budget.

I have to go off on a little tangent here. I know that some of you readers are thinking to yourselves "Savings? What? That is not an expense!" Wrong!! As a personal financial advisor I'm here to tell you that savings should indeed be considered an expense. Each month people should set up their personal finance budget for a certain amount of their income to go into savings. This should not be a "if I have money left over" situation. It should be definite and as automatic as writing that check for your house payment each month. The most fundamental concept of personal finance budgeting is to control spending and use your money wisely so that you have money left over rather than having no money or being negative (going into debt).

After listing all of your income and expense on your personal budget worksheet you need to subtract the expenses from your income and get a Net Cash Flow for the month. The goal is to include all income and expenses and come out with positive net cash flow on your personal budget worksheet. If the number comes out negative then you have a problem and your expenses will need to adjusted accordingly.

Now you know exactly what personal finance budgeting is and how to make one. The next thing I would suggest for you to do is run a few Google searches and try to find a template of a personal budget worksheet or free personal finance software. I would suggest searching "personal finance budgeting", "personal budget worksheet", or "personal finance budget". I actually ran a few searches myself have provided one link to some free personal finance software (I hate to drive track away from my website by providing links). Here is a link to a Personal Budget Worksheet . This free personal finance software is made to run with excel and come from the Microsoft website.

A personal budget worksheet should be used on a monthly basis. Yep, that's right! You need to keep personal finance budgeting for every month. You cannot simply make one personal finance budgeting plan for the whole year and stuff it away in a drawer somewhere to forget about it. Every month things change. Our income levels change and your expenses change and these changes need to be accounted for in our personal finance budget.

What you need to do to be successful with your personal finance budgeting plan is make out a projected personal finance budgeting plan for the whole year. Then as each month goes by you can make individual monthly adjustments. The other important thing to do is keep track of your actual income and expenses and compare that to your personal budget worksheet. You want to make sure that your original estimates were correct or at least close.

When making comparisons between personal finance budgeting estimates and your actual financial a situation you want to adjust everything to make it work.

The great thing about a personal finance budget is that it helps set you up for success and helps keep you from needing to use credit cards to get by. If you have set up your personal finance budget then you will be prepared for those unexpected financial burdens in life. If you have been sticking to your personal finance budget for six months and saving, say $100 a month, and also end each month with a positive $50 cash flow then there should be no issues when your car breaks down and you suddenly need $300 to fix it. All is good because you have $600 in savings and an extra $300 from your positive cash flows each month.

This is the essence of financial freedom, personal finance and personal finance budgeting. If you can eventually build up a good level of savings then you can begin to be at ease with your personal financial situation and now be stuck worrying about how the next bill is going to be paid. Most people are clueless and don't realize that their unplanned/unwritten actual personal finance budget includes something like $2500 of income and $2700 of expenses each month. If you are interested in seeing how small amount of savings can help you I suggest you read my post about Personal Finance Savings and check out the savings calculator I have there.

That should be about it for today's lesson. I know things were a bit jumbled and all over the place but I hope I was at least able convey what a personal finance budget is and why it is important to have one. I hope all of you can now go out and create your own personal finance budgeting plan. And for those that find it to hard, employing a personal financial advisor might be a better option.

Next my next post I am going suggest a few personal finance software programs that are available out there. That could help assist you in creating and maintainig your personal finance budget


How to achieve Personal Financial Freedom: Summary of Lessons 1-6

Financial Freedom Mini Series: Lesson 1

Financial Freedom Mini Series: Lesson 2 - Part 1

No comments: