What is a Personal Budget.

A personal budget is nothing but a systematic plan that helps in allocating of your income. While allocating your income you may want to put aside a certain amount toward expenditure, a certain amount toward debt repayment and the rest toward savings.

There are various tools that you can use to create your personal budget. You can use the old fashioned pencil and paper. However, if you are more techno savvy you may consider using any of the budgeting software available. There is spreadsheet software such as Microsoft Excel which allows you to track income and expenses and perform calculations using simple formulae. Money management software such as Microsoft Money can help you keep track of your savings and checking accounts and display monthly reports of past expenses.

Of course there are alternatives. Remember we are fostering a savings mindset. Open Office is a free and extremely useful alternative to using hard earned money to purchase a budgeting program. Open Office will as a extra bonus read files created by Microsoft's Excel and also other Microsoft Office Programs.

Budgets are not cast in stone and should ideally be flexible. Budgets are bound to change from month to month and should be reviewed periodically to check which categories are prone to cost overruns so that adjustments can be made accordingly.

Allocation of your income into different segments:

So how can you allocate your income into different segments? Generally you will have certain fixed expenses every month such as food, clothing, car and house payments, insurance and taxes. For some there may be other categories included in this such as medical expenses and education expenses. Work out the categories that suit your requirements. These may change over a period of time, so make sure that you add or take off a category from your list when required. Once you have your categories in place you are ready to start creating your budget.

The MSN Money's editor-in-chief Richard Jenkins has created a budgeting system known as the 60% solution. According to Jenkins you should allocate 60% of your income to the above mentioned categories. The remaining 40% can be distributed into the following categories with a 10% apportionment per category:

Retirement:

Set up a retirement fund

Long-term Savings:

This money may eventually move into your retirement fund but in the meanwhile you can use it for making large purchases or to meet large expenses such as fixing the house or buying a car.

Unexpected Expenses:

Has your microwave packed up and do you need to get yourself a new one. These are the kind of unexpected expenses that this section of your budget will cover.

Mad Money:

This is the money you will spend on the frivolous little things like entertainment etc.

Of course you may not be able to make such a neat division in your budget. For instance, your mortgage payments may be very high in which case you may need say 70% of your income to meet your regular expenses. So as you will realize budgeting is a very individual exercise as people have such varying needs.

Having created your budget, how can you make sure that you stick to it. A good tip that generally works for most people is the good old fashioned envelope system. Create envelopes for every category in your budget. Place the money allocated for that aspect into the envelopes. Now every time you need to make an expense, you can remove the money from the appropriate envelope. You can also place a small slip inside the envelope in which you can note down how much you have taken and for what. This will help you track expenses and also keep an eye on overruns.

Budgeting is a simple but effective exercise that will help you spend your money in a planned and systematic way.

There are pitfalls or traps that many may get caught up in in a standard budget.

Please take a look at 'Cash Flow in your Budget' in MybFamily Budget, hub.