A budget helps you figure out your long-term goals and how to work towards achieving them. If you drift aimlessly through life and toss your money at every shiny object that happens to catch your eye, how will you ever save enough money to buy a car or be able to put a down payment on a house? A budget forces you to map out your goals, save your money, and keep track of your progress.
At first, you might feel miserable when you realize that brand new Xbox game or the gorgeous cashmere sweater in the store window doesn’t fit into your budget. But when you remind yourself that you’re saving your money to buy a new house, it will be much easier to turn around and walk out of the store empty-handed.
Far too many consumers swipe their credit cards and spend money that they don’t have. Before the age of plastic, people knew if they were living within their means. If they had enough money left to pay the bills and sock some away in their savings account at the end of the month, they knew that they were on track.
If you create and stick to a budget, you won’t find yourself in the precarious position of spending beyond your means. You’ll know exactly how much money you earn, the approximate total of your expenses, how much you can afford to spend per month, and how much you need to save.
Life is full of surprises, some better than others. If you get laid off, get sick or injured, go through a divorce, or have a death in the family, it can lead to severe financial turmoil. Of course, it seems like these emergencies always come at the worst possible time.
Your budget should include an emergency fund that consists of at least three to six months worth of living expenses. The extra money will ensure that you don’t spiral into debt after a life-altering crisis.
It’s not always easy to save three to six months’ worth of living expenses. Build it into your budget, set realistic goals, and start small. Even if you only put aside $10 a week, your emergency fund will grow slowly, but you’ll eventually hit your mark.
Building a budget forces you to take a close look at your spending habits. You may notice that you’re spending money on things you don’t need. Do you honestly watch all 500 channels on your costly, extended cable plan? Do you really need 30 pairs of black shoes? Budgeting allows you to rethink your spending habits and refocus on your financial goals.
Your first order of business is finding out exactly how much you’re spending every month. Do this by reviewing your bank statements, receipts, and financial files.
Some expenses, such as insurance payments, are intermittent. You’ll get the most accurate financial picture if you calculate an average for six months to a year.
Add up everything you’ve spent in the past six to 12 months. Divide the total dollar amount by the number of months. The total will be your average monthly expenses.
Once you’ve figured out how much money you need to stay afloat financially each month, determine your actual income. Get an accurate picture by adding any extra funds that come your way throughout the year, such as cash gifts, sale of items online or via garage sales, in addition to your regular salary. Don’t forget other income sources such as alimony, child support, interest, dividends, and rental income.
In order to determine realistic savings and debt-payoff goals, you have to figure out if you have a budget shortfall or overage. Do this by subtracting your monthly expenses from your income. If you determine that you’re making more money than you’re spending, then congratulations! You can earmark the overage for savings as well as to pay off debt.
The best way to figure out where you can cut your expenses is to track your spending and record your expenditures for a month. Insignificant items, such as a cup of coffee, add up over time. Even if you only spend $5 a week on snacks, that adds up to $260 a year, which is not an insignificant amount of money. Cut enough so that you have 10 to 20 percent of your income left over at the end of the month to add to your savings account. If you are unable to cut a sufficient amount from your budget, think of ways to increase your income.
If you aim to stick to your budget most of the time, you’re bound to reach your financial goals. Breaking your budget occasionally is okay, provided that you get back on track as soon as possible.
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