3 great reasons to have a personal budget

When you’re in business, a budget for your business income and expenses is a very useful planning tool. Yet I often find my clients don’t understand why they also need to have a personal budget.

These are my three favourite reasons to have both budgets...

Reason 1: You know where your business profits are going

You put a lot of effort into making a profit in your business. So, it stands to reason that you’ll want to make the most of the profit you’ve earned.

If you ever get to the end of the month and think, “Where did all my money go?”, you know you need a personal budget.

When you map out your upcoming expenses you can see exactly where your profits are going, and where there might be money leaks in your personal finances.

Having a budget gives you more visibility of your outgoings, which means you’ll also know how much you can put aside for future expenses (a holiday!) or put into your savings or investments.

Reason 2: You’ll know your personal break-even point

In your business you have a break-even point, that knowledge of how much your business needs to make or sell, to cover the expenses of the business.

You can work out the same calculation for your personal expenses.

With a personal break-even point, you’ll know exactly what your personal expenses are for the year (the usual time period for a budget) and how much business profit (or part-time salary) you need to make to cover those expenses.

Reason 3: Your business budget needs a buddy.

Your business and personal budgets can be the best of friends. They interact with each other when things are going well and give you the knowledge you need when you hit a bump (in business or life).

Let’s say your personal budget has three levels to it...

Good – your basic expenses are covered with no 'extras' e.g. movies

Better – your basic expenses are covered AND you can spend on 'extras'

Best – your basic expenses and extras are covered AND you have enough to put money aside for future short and long investments, travel, or a new car.

If your business budget is showing more profit than expected, you might be able to jump straight to the Best level for your personal budget.

If your business budget is showing that sales are slower than expected, or expenses have jumped, you may need to ease back to the Good level of spending.

When you have a depth of knowledge across both your business and personal finances you can make well-informed, and timely, decisions.

Making a personal budget

If you're in a shared household, you can do an individual budget or a budget for the household.

Separate out the different income streams in your personal budget, e.g. your job, their job, your business wages. All streams of income, no matter how small, are valuable and contribute to your household.

When you’re clear on your personal income and expenses, you can explore different options. Can you live on your partner's salary and put your business profits into an account to repay your mortgage sooner or a travel fund?

If your business income is currently a small amount, then consider putting it towards something tangible, e.g. a holiday, rather than everyday expenses, e.g. groceries, so that its more visible and seen as valuable.

When you have a personal budget, and a business budget, you have a complete financial picture of all your income and expenses which then gives you the confidence to make better decisions.