Why You Should Have a Budget
Making and sticking to a budget seems like a lot of work. Why bother, you might think. I make all my necessary payments every month, and my savings is holding steady. So why bother with budgeting? It’s just a lot of extra work.
One of the most important reasons to make and follow a budget is to keep yourself out of debt. Another important reason is to ensure you have money going into savings, rather than having all of it “disappear” without your being entirely sure where it all went.
Not having a budget is an almost certain way to accumulate debt. If you have a budget, you can plan for large purchases such as that Hawaiian vacation or a big screen TV by setting aside a small amount each month until you have enough to pay for it outright. Without a budget, you’re more likely to buy on credit, and then take time to pay for it afterwards. Unfortunately, the latter option makes these expensive purchases even costlier by adding interest to the amount you must pay for them.
With a budget, you can pay off all your bills every month, avoid accumulating interest, and set aside funds for savings and planned big-ticket purchases.
Video: How to Create a Personal Budget
How to Make a Workable Budget
Putting together a workable budget isn’t as much trouble as you might think. The first step is to start where you are.
For the next three months, keep track of all your spending. Don’t try to form your budget just yet. This step is to discover your typical spending patterns, average necessary spending, and the ratio between your income and outgo. This information will be vital when you formulate your actual budget.
There are several ways to do this. Use a budget tracking program on your computer or PDA, or a budget application on your phone. Or just bring a small notebook with you wherever you go and jot down everything you spend. After three months of record keeping, you’ll be able to look at how you typically spend your money.
From here, you can look at places where you can cut back a little in order to redirect this money to savings, either long-term savings or savings toward a large purchase. For example, if over those three months you average $300 a month eating out, you might set your budget at $250 per month so you can redirect that fifty dollars.
However, if you know your lifestyle won’t support a reduction in a particular area, don’t cut back drastically there. You’ll just be setting yourself up for failure. Make changes where you think you can, but be realistic, too.
Keeping track of what you bring in and where it goes out also helps you determine your income-to-debt ratio. Calculate your credit card payments, mortgage, car payments, and other outstanding debt as it relates to your regular income. Ideally, your income-to-debt ratio should be 36% or lower. If it’s higher than this, use your budget to pare it down. If it’s higher than 50%, you might want to seek the services of a financial consultant to construct your budget to help aggressively reduce your outstanding debt.
For the next three months, follow the budget you’ve set up. Then reevaluate to see if additional changes need to be made. A budget doesn’t have to be set in stone. It can shift and change from month to month to meet your needs. If a particular budget item isn’t working for you, making you feel like you’re failing from month to month, make an adjustment so you’re more likely to meet your long-term goals.
To get started putting together your budget, check out the following online tools and sample budgets.
Here, you can plug in your own numbers and the website will calculate your budget for you.
Here is a sample budget to base yours on.
Personal budget templates for Microsoft Office software to get you started with your record-keeping.
Video: How to Make a Budget Using an Excel Spreadsheet
Don’t Forget Your Savings
One item many people forget to include in their budget is their savings. A common attitude towards savings is that if there’s anything left at the end of the month, you’ll put some of it into your savings account and start building that nest egg. But too often there’s not enough left at the end of the month, or you end up spending it on something else.
Put savings into your budget as a monthly item. Pay into your savings account in the same way you’d pay any other bill. This way, you’ve planned it, and you expect it, and you’ll see your savings grow as a result.
Other important, often forgotten items to remember when setting up your budget:
- Regular auto maintenance. This isn’t a monthly bill, but it can throw your budget off if you have to have your brakes replaced, for example. Estimate your yearly costs for auto maintenance and divide this by twelve. Account for this money in your budget even though you don’t actually spend it every month.
- Medical expenses. Use a similar approach for these expenses, as well. Estimate your monthly medical expenses based on previous years and set aside an average amount per month.
- Home maintenance. Again, budget for average expenses so these costs don’t catch you off-guard.
- Utilities. Utilities are a monthly expense, but the costs differ greatly from winter to summer. Average these expenses so the larger winter heating bills or larger summer cooling bills don’t derail your budget.
Start calculating your expenses today and you’ll be well along the road to a manageable budget, and financial freedom.
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