As you sit down to pay your bills each month, how sure are you that you have enough money to cover everything? Do you have plans for what you’re going to do with the money that’s left over after you cover expenses? Do you even know whether you’ll have money left after expenses? These are just some of the questions answered by a budget.
A lot of people think budgeting is a bore. They don’t want to deal with numbers and calculations, so they don’t create a budget. Unfortunately, those people are missing out on one of the simplest, most effective money management tools out there .
Need more convincing? Here are a few reasons that you need a budget.
To organize your finances.
Each month you have money coming in and money going out. Do you know what’s coming and going? Having a budget consolidates your finances and helps you understand your total income and total expenses. It’s all right there on a single sheet of paper. A budget forces you to keep better track of your income statements, like pay stubs, and your monthly bills. Having these documents organized makes it easier to reference them when necessary (like tax time).
You can figure out where you’re wasting money.
If you never look at your spending on paper, you’ll probably never realize just how much money you’re spending unnecessarily. A budget forces you to look at where your money is going and answer for the money you’re spending. If it seems like you have holes in your wallet, a budget can help you plug those leaks. Because a budget requires you to list out your expenses, you can easily look at each expense and decide whether it’s a necessary expense or something you can live without. Without a budget, you might never go through the process of pruning your expenses.
Stay out of debt.
A budget can be a great debt management tool. How? Most debt arises because there are some expenses that can’t be covered using current income. When that happens, you’re forced to borrow money to pay the bills. Unfortunately, paying back what you borrowed doesn’t always happen quickly, leaving you with extra liabilities. With a budget, you can examine possible places to cut your spending so you don’t have to use credit cards or loans to make ends meet.
Keep your spending under control.
Without a plan, your spending can easily spiral out of control. Out of control spending is dangerous. It can deplete your savings (if you have any) and skyrocket your debt. Nobody wants to have that kind of financial lifestyle. Since you create a budget before you ever start spending, you’re better able to gauge the level of leisure spending you can afford. Updating your budget throughout the month allows you to see how much money you can afford to spend based on what you have leftover after your expenses have been covered.
Meet financial goals.
Savings and debt goals are easier to reach when you use a budget. After plotting your income and expenses, you calculate what you have leftover. That number is called your net income – the difference between your income and expenses. Your net income is the amount of money you have to meet your financial goals. For example, if you have a net income of $500 a month, you know you can put $500 toward paying off your debt. You can also use your budget to accelerate your progress toward financial goals. By using cutting out some of your expenses, you can increase your net income and move toward your financial goals at a faster pace.
Have a plan for spending money.
I like to compare living without a budget to going on a trip without a roadmap. You’re sure to get lost without one. You might make it to your destination, but it’s easy to get lost or sidetracked along the way. The same thing happens in finances. You might reach your financial goals, but it could take longer and cost more than it would if you’d used a budget to plan your spending. Like other plans, a budget can be changed. The key is a successful budget is starting out somewhere then adjusting your budget so it meets your needs.
Creating a Stellar Budget
Give your budget a few months to work. It’ll take you that long to get used to spending based on a budget. Plus, you may have to go back and change some things as you compare your spending habits to what you’ve budgeted. Make sure you’re disciplined and avoid cheating on your budget just so you can say it works.
Don’t think you need to have special financial software to create your budget – you don’t. Instead, you can simply write your budget on a piece of paper.
Make sure you include all your income and expenses. Don’t try to inflate your income or deflate your expenses. You aren’t trying to impress anyone with your budget. Besides lying on your budget will only hurt you as you try to spend money and learn that it’s already gone.
Adjust your budget as needed. Budgets don’t always work the first time around. You might have to tweak some of the numbers as you see whether your budget fits your needs. Also make sure you update your budget periodically as your income or expenses change.