Welcome to another installment of Financial Friday’s! Budgeting can become an overwhelming process. It can be as simple or as complex as you would like for it to be. But just like anything else you start you have to have a reason for starting. Reasons and/or Goals will help you keep in perspective why you started the first place.
If you are lost as why you should start one, I am sharing with you the five reasons why I started!
5 Reasons you need to make a budget:
1. Reach your financial goals
First you must understand the overall picture of your personal finances. Specifically identifying how money flows in and out of your household. This will allow you to see what needs to be done to reach those financial goals. The simplest way to start is to determine how much you’re spending. This can be done by collecting bank, credit card, and income statements for the past 6 to 12 months.
Once your determine how much you spend monthly, break down spending into categories like food, gas, entertainment, monthly household bills, etc.. Next, determine your monthly income. Once you identify whether you have a surplus or deficit each month, you can formulate ways to improve your situation. Create a timeline for reaching goals, such as paying off debt or saving for a vacation, to help motivate you.
2. To change your spending habits
Being in the dark about how much you spend and where you spend it, can make it difficult to change your spending habits. And even if you’re financially responsible, a budget can help you identify unnecessary expenses. Allowing you to redirect funds towards your goals. For example, if you don’t realize you spend $200 a month eating out, it will be much harder to break that habit. This makes it harder to apply that money toward your goals, such as paying off debt.
Most importantly, if you’re trying to get out of debt, it’s important to budget. To cut back on expenses, you need to first see where your money is going. This will allow you to limit yourself to a specific amount per spending category. Using the envelope budgeting system, can help make sure you don’t overspend.
3. To build wealth.
Once you have a clear picture of your overall finances you can shift your focus accordingly. This will enable you to aggressively eliminate debts and building wealth. While for some eliminating debt can take some time, remember that is your ultimate goal. Once you’re in the habit of putting certain money toward debt, once eliminated remember to continue with that habit. For example, redirect that money toward savings, a new car, etc.
As you build your saving and invest your money, you will be able to generate passive income. Passive income will generate from interest payments and capital gains. This will allow you to use your monthly generated income to handle regular expenses. In other words, you are able to increase your total income simply by being smarter when using regular monthly income.
4. To plan for retirement.
While retirement can seem a long ways away, the time to be planning for it is now. According to The Cheat Sheet “more then half of Americans have less then 10,000 saved for retirement”. While one in three have nothing saved at all. This is shocking right, how do they expect to live once they’ve retired. Let’s talk about how much we should have saved by a certain age.
According to CNN by 35 you should have twice as much of you salary saved, at 40 three times, at 45 four times, etc. So where do you stand with your retirement? I am currently no where near 4 times my salary. But there are other factors involved for instance, I received a promotion that caused my income to almost double, before that I was close to three time my income. Saving for retirement is not a black and white process; it has its gray area, due to lifestyle, income, marital status, so it is hard to say what you will need. Check out this Retirement Calculator to see where you stand.
5. For peace of mind.
If you don’t have a budget, you will spend more money then you have, it inevitable. Creating a budget will help you justify necessary or even required expenses. In fact, not knowing your monthly income and expenses will make the desire for an item alone, a justified expense. Have you every splurged on an item and felt terrible or guilty after buying it? This make you’re less likely to enjoy that item and remind you of that guilt.
Before budgeting, this was a common feeling I had when splurging on items. Having a budget can make purchasing items whether big or small more guilt free. When you can look at your monthly income and know your limits it’s much harder to splurge. Instead when a desire object is too expense, you can budget for it. This make for more guilt free shopping and gives you peace of mind to enjoy your new items.
In conclusion, creating and following a budget involves self-discipline and sacrifice, but will help you develop smart spending habits. This will allow you to better manage your finances now and into the future. Updating your budget regularly will allow you to reflect changes in your situation, such as a raise, marriage, or new car. You can also experiment with different ways to help you stick to budget, like the envelope budgeting methods listed above.
How has budgeting helped your financial situation? Leave a comment below!