How to Create a Personal Budget and Stick to It Painlessly

Creating a personal budget which you are able to stick to can make an impressive difference to your spending ability and reducing money-related stress. However, developing a personal budget and making it work for you requires no less discipline than sticking to a diet.

See where you are

First of all, as Richard Feynman instructed a graduating class at Caltech: “The first principle is that you must not fool yourself-and you are the easiest person to fool.” Set realistic financial goals for yourself. Check out your account statement for the last few months to get a true image of where your money goes to. Think of areas where you may be able to cut back a little. List all the items that are fixed and cannot be reduced – such as mortgage, monthly car payments, or your child’s school fees. Subtract those from your monthly income to arrive at the amount of money that is left for you to spend on everything else. If the amount you end up with seems not enough for your monthly spending on clothes, food, entertainment, utilities, and medical care – consider switching to a smaller (cheaper) apartment or exchanging your SUV for a more fuel-efficient car. In most cases what you name “fixed expenses” are things you simply don’t want to change rather than necessities. Remember – you must not fool yourself.

Start an emergency fund (yes, really)

Secondly, you need an emergency fund. This may sound like something completely abstract to you at this point, but trust me – even if you’re making the minimum wage and your account rarely has any money in it, you can still have one. I would even say that especially then you should have one. And you need to start it right now. Even with a miniature amount of money that you put aside every time you receive your salary or a bonus – just put some of it into a separate account. Emergencies happen. You can’t always foresee when your fridge breaks down, your car needs to be fixed, or your child gets sick. For situations like that, you should have a personal emergency fund from which you can borrow money instead of charging all this on your high-interest credit card. And once your financial situation improves, you should also think about setting up a slightly bigger emergency fund – maybe equal to your 3-6 month income. This one will serve you in case of bigger disasters such as losing your job or getting seriously sick.

Kill your debt

Thirdly, slowly attack your existing debt. The interest you pay every month on your outstanding debt is killing a considerable portion of your income. Start making more-than-minimal payments every month to pay off your smallest liability, and then tackle the next one, until you get yourself out of that interest-bearing hole. And every time you manage to decrease the amount of monthly interest you pay to your bank, start using that money towards building your emergency fund. You have already started one, right?