The process of creating a plan to spend your money allows you to determine in advance whether you will have enough money to do the things you would like to do.
Once you create your first budget, begin to use it and get a good feel for how it can keep your finances on track, you may want to map out your spending plan or budget for 6 months to a year down the road. By doing this you can easily forecast which months your finances may be tight and which ones you'll have extra money. You can then look for ways to even out the highs and lows in your finances so that things can be more manageable and pleasant.
Extending your budget out into the future also allows you to forecast how much money you will be able to save for important things like your vacation, a new vehicle, your first home or home renovations, an emergency savings account or your retirement. Using a realistic budget to forecast your spending for the year can really help you with your long term financial planning. You can then make credible assumptions about your annual income and expense and plan for long term financial goals like starting your own business, buying an investment or recreation property or retiring.
Why Prepare a Personal Budget?
Gain Control Over Your Money
A budget is a way of being intentional about the way you spend and save your money. It is said that with budgeting, you control your money instead of your money controlling you. Budgeting saves you the stress of suddenly having to adjust to lack of funds. It also helps you decide if you want to sacrifice short term spending like buying coffee everyday in exchange for a long term benefit -- a cruise or a new HDTV. In budgeting, you are able to identify and eliminate unnecessary spending like late fees, penalties and interests. These seemingly small saving can add up over time.
Enjoy Clarity & Order
With budgeting, you have a clear picture of what is coming in, how fast it goes out, and where it is going to. Budgeting saves you from wondering at the end of the month where your money went. That way, it is easy for you to make adjustments. Budget also serves as a reference for organizing your bills, receipts, and financial statements. When all of your financial transactions are organized for tax time or creditor questions, you save time and effort.
A budget enables you to know what you can afford, take advantage of buying and investing opportunities, and plan how to lower your debt.
Plan & Achieve Goals
Establishing a budget helps you avoid spending unnecessarily on items and services that do not contribute to reaching your financial goals. Budgeting allows you to plan to set aside money for emergencies. When you budget and take a “big picture” view, you will see potential shortfalls in advance, and be able to make adjustments before the problem appears.
Taking debt is not necessarily a bad thing if the debt is necessary or you can afford it. Budgeting shows you how much a debt load you can realistically take without being stressed or if taking the debt load is worth it.
How to Prepare a Personal Budget
Identify Your Income & Expenditures
First, collect information on your savings, checking, investment accounts, and any other financial instruments. Then find your monthly income and determine the average monthly amount that you receive.
Next, determine your monthly recurring debt payments. Calculate the total amount owed on each debt account as well as the minimum monthly payment. This includes car loans, mortgages, credit card debt, student loans, and all other debt that your family pays on a monthly basis.
Finally, determine your monthly expenses - receipts, utility bills, any other expense that arises during a one month period and determine an average amount of expenses for each category.
Now you can see whether you are overspending or underspending. Ideally, during this step you will find that you are living within your means, and maybe will even have a little left over on a monthly basis. On the other hand, you may determine you must make adjustments to your monthly expenses in order to live within your means.
Depending where you are in your budget, you may want to consider new monthly allocation to a savings account, IRA, 529 college savings plan, or other savings vehicle. You may be able to devote income to building an emergency fund or setting aside additional monthly amounts towards debt payments like student loans and mortgages and paying down your credit cards. Maybe you want to save for big ticket items like international travel, a car, a renovation, or a down payment on a house, or put aside for an investment property, income property, or other investments.
Monitor and Adjust
Once you have an established budget, you will want to keep it in check. Monitor your budget periodically to adjust for changes, achieved goals and additional unexpected expenses.
The knowledge that you are making sound long term and short term financial choices will provide you with a great deal of comfort, and will take you from living paycheck to paycheck to being able to see the long term results of your disciplined savings and financial planning.