Saturday, May 12, 2012

Personal Budgeting - Four Simple Personal Finance Categories and How to Manage Them

Finance categories make it simple to manage your cashflow and to keep more of your money for investing and for using toward securing financial freedom. Many clients who I speak to have tried budgeting and have set up finance categories which were far too complicated to keep up with when life started to get busy. In this article, I'll be showing you four simple personal spending categories which you can use to achieve financial freedom starting right now.

The Four Simple Personal Finance Categories

Most likely you have seen the budget spreadsheets which are 60 feet long and which contain numerous personal spending categories. The problem with these is that they are far too numerous and complex to live on and even if you do succeed, they take all the fun out of your life. You can become more involved with the budgeting procedure and lose site of the intent of budgeting. When it comes to succeeding with your personal spending, you need to keep things simple. Here are the four personal finance categories which I found to be the most basic when it comes to managing personal cash flow:
  1. Living expenses
  2. Giving
  3. Cash Reserves (for planned spending or for emergencies)
  4. Investing

Every kind of spending that you do can be narrowed down to one of these four categories. By keeping track of your spending in these areas and planning your cash flow management according to them, you will have a much easier time getting control of your financial life. Let's look at a simple way for managing these categories...

The Order of the Four Personal Finance Categories is Key

Making the four personal finance categories work is all about allocating your disposable income according to what your highest priorities are. Here's an example:

1. Investing of 10%
2. Giving of 10%
3. Cash reserves of 10%

Once you've made these three a priority, the remaining 70% is usually more than enough to pay your expenses. Of course, this can be difficult to believe if you've been living paycheck to paycheck, but just try it for a month. Even if you think you cannot allocate the percentages above, choose a lesser amount, which you can allocate consistently until an increase can be made. If you manage your spending according to these four personal finance categories, you'll discover that you have more money than you thought and having more control of it will help you get more value out of it.

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