Your feedback is essential to help us improve - click here to take our 3 minute survey.

Personal budgets and finance plans explained

Personal budgets and finance plans explained
Image source: Getty Images


With the ever-advancing internet comes a vast range of financial and non-financial products available at our disposal. More choice usually means more competition and better deals for us. However, it can be easy for us to get lost in the online world, signing up for products without being fully aware of the impact they can have on our finances.

To help regain control, it is a good idea to create structure and stability, helping you stay afloat and secure. A personal budget and a finance plan are useful tools that help you do this. They help maximise how much money you have in your pocket, both now and in the future.

A personal budget and a finance plan are created to keep track of your income and expenses, with the aim of reducing spend, increasing income and tackling debt. If used correctly, they can be transformative for your household finances.

The information required to create a personal budget or finance plan is likely to be very accessible to you, making the process both easy and rewarding.

So, what are personal budgets and finance plans exactly?

Personal budget

A personal budget is a detailed list of your personal or household income and expenditure. It is usually a snapshot of the income and expenditure for a very short time period – usually a month – governed by your personal finance cycle (how regularly you get paid).

The budget works by adding together all your expenditure and subtracting it from your total income, leaving you with your net income. Your net income is your disposable income – the amount of money you have left after all expenditure has been subtracted.

Your net income is the starting point for improving your finances. First, we want this to be a positive number, meaning you have money left over after all expenses are paid. It’s then possible to identify where you may be overspending and where costs can be reduced. Finally, you can start thinking about paying off debts quicker or saving more. 

Your personal budget can be managed using a range of budgeting tools, such as an Excel spreadsheet. There are also many applications and templates available online for free or for a small charge.

Creating a budget is a great way start to taking responsibility for your finances, helping you free up more disposable imcome, reduce debt and improve savings. Check out our budgeting template to help you get started.

Personal finance plan

A personal finance plan is a step up from a personal budget. It allows for planning the longer-term future of your finances, such as a car purchase, a holiday or your retirement. The information used to create your personal budget is extended over a longer time period – usually 12 months – but it can be even longer.

A personal finance plan does require some forward-thinking. It is constructed using your long-term wants and needs. It is created to help provide structure to your future finances, so you’ll need to have an idea of what is to come. It also incorporates your personal goals and uses these to configure priorities and achievable timeframes for your targets set.

To summarise

A personal budget:

  • Is a detailed list of your income and expenses
  • Shows your net income (total expenses subtracted from total income) – a positive net income is what we want here!
  • Is a snapshot of a short time period, usually one month
  • Can be managed using a variety of tools (Excel, online apps, etc.)
  • Is useful for clearly showing your cash flow

A personal finance plan:

  • Uses the same starting information as a personal budget
  • Allows you to plan the future of your finances
  • Is extended over a longer time period, usually 12 months
  • Requires forward thinking and personal goals
  • Helps you plan for future financial commitments and targets

Paying credit card interest? Time to switch to a 0% balance transfer card.

If you can’t afford to clear your credit card balance at the moment and are paying monthly interest, then check to see if you can shift that debt to a new credit card with a long 0% interest free balance transfer period. It could save you money.

By transferring the balance of any existing card (or cards) to a new 0% card, you could be debt-free more quickly – since your repayments will go entirely towards clearing the balance of the debt you owe, and not on interest charges.

Discover our top-rated picks for 0% balance transfer credit cards here and check your eligibility before you apply in just a few minutes – it’s free and won’t affect your credit score.

Was this article helpful?
YesNo

Some offers on The Motley Fool UK site are from our partners — it’s how we make money and keep this site going. But does that impact our ratings? Nope. Our commitment is to you. If a product isn’t any good, our rating will reflect that, or we won’t list it at all. Also, while we aim to feature the best products available, we do not review every product on the market. Learn more here. The statements above are The Motley Fool’s alone and have not been provided or endorsed by bank advertisers. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK has recommended Barclays, Hargreaves Lansdown, HSBC Holdings, Lloyds Banking Group, Mastercard, and Tesco.