A personal budget is a plan for spending money in a way that satisfies your lifestyle priorities while helping you achieve your financial goals. The amount of money you choose to spend in a given area is a personal decision, but the basic elements of a personal budget are the same.
The key element to any budget is income. Without a regular source of funds, there is no sustainable way to pay bills and make purchases. For budget planning and management purposes, your net income, or take-home pay, is the only income that's important because it's the only income that is spendable. If you have other sources of regular income, add those to your budget as well, but a New Mexico State University publication, "Managing Your Money: Developing a Spending Plan," advises that it is unwise to add sporadic income or bonuses.
Fixed expenses are bills that stay the same. Rent, car payments and car insurance bills are usually a set amount over a set period of time. This predictability makes fixed expenses easy to account for in planning and managing your budget.
Flexible, or variable, expenses fluctuate from one billing or budget period to another. The electric bill may be $100 one month and $150 the next for example, and you may spend $25 on gasoline one week but need $35 the next. Flexible expenses can be estimated and controlled with good budget habits.
Unplanned expenses are a basic element of any good budget. According to financial author Dave Ramsey, emergencies always arise. By having funds set aside for dealing with unexpected events such as a flat tire or a broken water heater, you won't have to go into debt or completely ruin your budget to deal with the surprise expense.
All the experts tell you to pay yourself first, and that's where savings come in. Set aside a minimum of 10 percent of your income before paying any other bills and you'll quickly find yourself with a growing nest egg. Hold onto your savings for the long term to fund retirement, or let it build for short-term goals such as taking a vacation or buying a new car.
- New Mexico State University: Managing Your Money: Developing a Spending Plan
- "The Total Money Makeover: A Proven Plan for Financial Fitness"; Dave Ramsey; 2007
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