If you are keen on personal financial management, budgeting can take you a long way. Before we explain how it helps, let us give you some definitions of what budgets are;

“A budget is a future oriented draft of your revenues and expenses and the ways and means of achieving this target.”

A budget is usually drawn for a period of 1 year, but you can have a tentative plan for the next 5 years or even 10 years. This document should be your guiding light when it comes to personal financial management. Anything significant out of the budget should be re-evaluated before making it a reality—yes, even the revenues.

The reason behind the word “draft” in the definition of the personal budget above is concerning the nature of uncertainty around us. As you continuously monitor and improve your personal financials based on the budget, there should be room for improvement in the budget. Your budget should be flexible enough to accommodate these changes that will come throughout a year.

Since all of us are equipped with the power of technology these days, access to a simple spreadsheet is not a costly affair. A simple budget format would suffice for a novice into budgeting. As you progress to the second and third years of your budgets, you can adopt a more advanced budget format allowing in depth financial planning and analysis. There are mobile apps that could help with your budgeting activities as well.

The importance of a personal budget is that this document will always keep you in check regarding your incomes and expenses. When you add your ‘actual’ incomes and expenses next to the budget line items, you will have a clear idea of the areas you are winning or bleeding. If you can fix the bleed, so be it. If you cannot, you need to find an alternative source of money (income) to cover the bleed or cut back on another expense.

An important note is that when preparing budgets, you should always plan for 10% more than what you can earn. Likewise, 10% less than what you are used to spend. This way, you will always push yourself for better financial management and overall achieve a better personal finance position.