Budgeting is an important part of independent financial well being. Budgeting can be painful and difficult to stick to; it can also be helpful. Most people use budgets for making sure that they can have savings in case of an emergency, to plan retirement and a key to getting them out of debt.
Using a budget can help you understand your spending habits, and show you where you may be spending too much money.
Once you understand your spending habits, you can monitor and control them, then you can change them. Budgeting can help with making your financial future secure and predictable.
Look at your expenses.
Categorizing them is the best way to monitor them, such as auto expense, groceries, electric and gas, credit card debt, etc. Go through a couple of months of records and categorize everything that you spent, make sure to include your credit card expenses.
Find an average of all expenses in all general categories for the months that you included. Are you spending a lot in the entertainment category?
Are you spending more in the entertainment category than you are putting into savings? You are never too old to start planning for your retirement; with the inflation of the US dollar, you need to start thinking about it now.
Think about this: If you are 25 years old, your annual income is $32,000 and this is a comfortable lifestyle for you, you currently have no savings, but you are currently putting away $100 a month into a 401K or IRA.
You will need $1,739,000 to retire at the age of 65, but you will only have $403,000 at the age of 65 even using the most aggressive of investing if the market performs averagely and if you continue of to invest $100 per month.
Looks like you may come up a little short. (If you are not sure about how much you will need to retire, look for a retirement calculator on the internet, Fidelity has a fun little interactive calculator that you can use.) A budget can help you with figuring out just how much you can get into a savings plan comfortably.
Look at your income.
Where does your income come from? Is it steady or sporadic? Categorize your income as you did with your expenses.
Subtract your expenses from your income. Are you coming up negative? If you did, then you are overspending and you need to get it under control. Over-extending yourself will cause you to end up with nothing but problems later on, so it is to your benefit to fix the problem as soon as possible. A budget can help you see where you are overspending and where you can cut back.
Do you really need that new DVD? Did you really need to stop at the coffee house every morning? Even though these are little purchases, they add up quickly! Frivolous spending is a killer if you can afford it, good for you, but most people cannot afford it. Unfortunately, most people don’t understand that they can’t afford it. This is where a budget can help you. It will help you understand just how much you are spending and on what, it will also allow you to see where you can cut out some unnecessary spending habits.
Budgets also help with long term planning and cash flow.
Cash flow is important and poor cash flow can lead to an additional credit card or revolving debt.
If you need to pay your electric bill, but you overspent at the grocery store, then you might choose to pay your electric bill with your credit card or line of credit.
Maybe you know that you are going to be missing a week of work in two or three months, so you will lose the income.
You can plan on stashing enough money to make up for the missing income. Consider making a budget three months at a time, or using a cash flow chart for a six month to a year period.
This may make a large difference in understanding the dynamics of your spending and income. It will also help you plan if you can afford to make large purchases such as cars, boats, and homes.
Getting out of debt is the biggest reason for using a budget.
In 2006, revolving debt reached $876 billion in the United States. Financial stress also became the leading cause of divorce in the US in 2004.
It hasn’t changed since then. Rich and poor can improve their financial situation from budgeting. I recommend budgeting for every household in America, let’s get this country out of debt!