Managing your money: How to create a budget?

Investment planning always starts with a budget. By organizing your income and expenses over time, you can better control your personal finances, save more, and manage payments more effectively. There are guidelines to help you refine your budget.

Planning is one of the cornerstones of personal finance, and perhaps the key to its success and purpose. In order to achieve financial goals and effectively manage one's wealth, it is important to be organized. This is accomplished by creating a personal or family budget. It is important to understand the importance of a budget, the benefits it provides, and most importantly, how you can create it easily and effectively to continually improve your finances.

What is a personal budget?

A personal budget is essentially a way of organizing income and expenses intended for a specific period of time. Ideally, you should adjust your goals each month based on your current financial situation.

Your budget should account for all income during that period. Besides your salary, this might include rental income from property, passive income from investments, or other secondary sources. At the same time, you should outline your anticipated expenses for the month, including estimated costs for utilities, mortgage or rent, food, entertainment, etc. In essence, it's about documenting your income and expenses for a given time frame.

What are the benefits of budgeting?

The main benefit is gaining control over personal finances, which leads to higher savings and better payment planning. In addition, you can build up a financial cushion to cope with unexpected events in the future and, of course, to save for the long term, giving you greater peace of mind.

The goal of managing your money through budgeting remains the same: better financial health, greater stability and more peace of mind. You can also use it to manage other expenses, such as car or home insurance payments, financially plan vacations and set long-term goals that can really improve your financial well-being.

How to create a budget?

According to Bank of America, a common rule for creating a personal budget is the 50/30/20 rule. The first part, which is 50% of your income, should be used for mortgage payments, utilities or loans, and food. For example, if your salary is €2,000, you should use €1,000 for these essential expenses.

The remaining 30% should be used for leisure activities, non-essential expenses such as subscriptions, vacation planning and other possible purchases during the month, such as clothing or household appliances. Thus, 600 euros of this salary can be used for these discretionary items.

Finally, the remaining 20% should be reserved for savings and the creation of an emergency fund. With these savings, you can distinguish between long-term goals, such as retirement, and short-term needs to build up a financial cushion. This means saving 400 euros per month for one or the other.

Your budget, beyond the basics

Although this rule is widely followed, you should ideally adjust your budget. To do this, it is advisable to record your monthly income as well as your fixed and variable expenses. In this way, you can determine the appropriate percentages for you, whether 60/30/10 or 40/30/30. The split may vary depending on your personal circumstances.

In any case, always set aside a portion for savings, whether it is 5, 10 or 20%. Saving is undoubtedly the key to changing your personal finances and achieving greater peace of mind. For this reason, it is important to differentiate between short-term and long-term savings in your savings strategy.

Short-term saving focuses on creating an emergency fund to cover expenses such as car maintenance, insurance payments or unexpected home repairs. This financial cushion can vary depending on an individual's or household's standard of living, but for more security, it should ideally be the equivalent of three months' salary. So, using the earlier example, this emergency fund could be around €6,000.,

Never forget to invest

Long-term savings transform anyone's financial health. Once you have that financial cushion, even if you keep increasing it for security, you should start thinking about the future. According to the 50/30/20 rule, 10% of your income — part of the 20% set aside for savings — should go into long-term savings. In this context, that would be 200 euros.

The best way to save for the future, whether it's for retirement or for greater peace of mind, is investing. Investing in the financial markets through mutual funds, index funds, ETFs or other products can make a significant difference. Using this example, a person who saves 200 euros every month over the long term would accumulate 48,000 euros after 20 years, which would fall to 39,089 euros due to inflation.

However, if the same amount (200 euros per month) were invested in a portfolio that yields an annual return of 7% over 20 years, it would grow to 105,276 euros— adjusted for inflation, it would be 96,365 euros. This means that they would have 2.4 times as much wealth if they had invested their money instead of leaving it unused.

Small expenses

One of the major transformations that can be applied to money management is gaining control over small expenses. These expenses refer to those minor, seemingly insignificant costs that, over time, add up to a substantial outlay. For example, spending 10 euros every week on playing the lottery amounts to an annual expenditure of 480 euros. Redirecting these funds to long-term savings could raise your yearly savings from 2,400 euros to 2,880 euros.

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