A budget helps you figure out your long-term goals and work towards them. If you just drift aimlessly through life, tossing your money at every pretty, shiny object that happens to catch your eye, how will you ever save up 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, keep track of your progress. OK, so it may stink 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 up for a new house, it will be much easier to turn around and walk out of the store empty-handed.
Far too many consumers spend money they don’t have and owe it all to credit cards. Before the age of plastic, people knew if they were living within their means. At the end of the month, if they had enough money left to pay the bills and sock some away in savings, they were on track. However, if you create and stick to a budget, you’ll never find yourself in this precarious position. You’ll know exactly how much money you earn, how much you can afford to spend each month and how much you need to save.
Life is filled with unexpected surprises, some better than others. When you get laid off, become sick or injured, go through a divorce or have a death in the family, it can lead to some serious financial turmoil. Of course, it seems like these emergencies always arise 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. This extra money will ensure that you don’t spiral into the depths of debt after a life crisis. Of course, it will take time to save up three to six months’ worth of living expenses. Build it into your budget, set realistic goals and start small. Even if you put just $10 aside each week, your emergency fund will slowly build up.
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 re-focus your financial goals.
Your first order of business is finding out exactly how much you’re spending each month. Do this by consulting your bank statements, receipts and financial files. Because some expenses are intermittent, such as insurance payments, you’ll get the most accurate financial picture if you calculate an average for six months to a year. Add up everything you spent for the last six to 12 months and then divide by the amount of months, which will give you your average monthly expenses.
Once you’ve figured out how much money you need to stay afloat financially each month, it’s time to determine your actual income. Besides your regular salary, get an accurate picture by adding in any extra funds that come your way throughout the year, such as cash gifts, sale of items online or via garage sales, and don’t forget other income sources like alimony, child support, interest, dividends and rental income.
In order to determine realistic savings and debt payoff goals, you must find out if you have a budget shortfall or overage. Do this by subtracting your monthly expenses from your income. If you determine you’re making more money than you’re spending, congratulations. This amount can be earmarked for savings and to pay off debt.
The best way to figure out where you can cut from your expenses is to track your spending and record every expense for a month. Insignificant items such as a cup of coffee add up over time. Even if you spend just $5 a week on snacks, that adds up to $260 a year, which is not insignificant. Cut enough so that you have 10 percent to 20 percent of your income left over each month to add to your savings account. If you are unable to cut a sufficient amount from your budget, consider ways you can increase your income.
Aim for sticking to your budget most of the time, and you’re bound to reach your financial goals. Breaking your budget occasionally is OK, providing you get right back on track as soon as possible.
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