Simply put, a budget is a spending plan. It details how much you earn, how much you spend and what is left over. If you have any money left over you have a budget surplus or an excess. If you don't, you have a budget deficit or shortage. If you happen to fall into the budget deficit category you have to cut non-essential expenses until you have a surplus. Your budget is the key to ultimately building wealth.
What Are the Benefits of Budget
Maintaining a budget allows both individuals and families to become debt free, save money and ultimately achieve financial freedom. Whether you are looking to pay for your next car in cash or fund a college education for your children, establishing a budget is a sure way of doing it. Starting a budget today can help you:
- Determine how much is money is coming in and going out;
- Plan for each of your financial goals;
- Avoid overspending;
- Save money to invest.
Why Some People Fail at Budgeting
Many people fail to live within their budget when it is too restrictive. Therefore, it is a good idea to allow room for leisure, entertainment and some discretionary spending. By doing this you are allowing your budget to be somewhat flexible and you will become more comfortable with in it.
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Creating a Budget
One of the most frequently asked questions about money management is how to develop a household budget that works. Far too often, people wait until they are in financial trouble before they think about budgeting. A person may be laid off or find themselves dealing with a large unplanned expense for which a household budget could have helped.
Getting started with your budget is simple. There are four essential steps to a successful budget:
- Establish your goals;
- Determine your cash inflow;
- Determine your cash outgo;
- Monitor and modify as needed.
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Establish your goals
Everyone has a reason for budgeting. Paying down debt, saving for a big-ticket purchase, or increasing savings are examples of goals you might set when establishing your budget. The main thing to remember when establishing your budget goals is to be specific. In fact, it is a good idea to use the SMART Goal System (Specific, Measurable, Attainable, Realistic and Timely).
Many people fail at budgeting because they don't use this system. This system ensures that your budget is within your grasp.
Determine your cash inflow
Many of us know how much money we earn weekly or bi-weekly from our jobs. That is a good start. It is also necessary to track what is coming in during a given month and from all other sources. If someone gives you a one time financial gift, track it. If you receive a gift card to your favorite store, track it. When you receive a tax refund, track it. Track everything that comes in.
If you are having a hard time keeping good records it may be a good idea to invest in home budget software, such as Budget Forecaster. Or, if you need a full money management system, you might want to try a money management program, such as Quicken® or Microsoft Money®. Each of these programs can automate the budget process and make it easier.
Determine your cash outgo
Do you balance your check registry? Do you read through your banking and credit card statements? How much money do you typically have left over at the end of the month after paying all your bills? These questions help to accurately determine your cash outgo. If you are doing these things, chances are you know what is going out on a monthly basis.
If you are not regularly monitoring what is coming in and going out then you could possibly be going into debt. This is why a budget is critical to anyone looking to get their finances in order.
Monitor and Modify as needed
Monitor your spending against your budget throughout the month until you get used to living within your budget. If you go over or you feel one area of your budget is too restrictive, modify your budget to make to make it work for you. Remember, the key is to use the SMART Goal System. This will help devise a budget that will work for you.
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Sample Budget
The basic elements of a budget will be the same for everyone; determine what is coming in and what is going out. See sample budget below:
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Tips On Budgeting
Maintaining a budget can be difficult in the beginning and it can also be discouraging when there is no money left over after all expenses have been paid. However, there is always light at the end of the tunnel. Here are some tips on budgeting to get you through the rough patches.
Start Today
Never put off budgeting until tomorrow. You should start today.
Don't Give Up
Quitting is not an option. Your financial future is too important and many of your future goals depend on your budgeting today.
Use a Software Tool
Software applications, such as Microsoft Money®, Quicken® or Budget Forecaster®, all help you with budgeting. This is one of the most basic functions of a good personal finance tool. Later, when you get the basics down you can use some of the more advanced features provided by these tools.
Monitor Your Progress
At the end of the month are you reaching your goals? If not, what can be done differently? Remember, the more you success you have with budgeting the easier it becomes.
Consult A Financial Counselor and Planner
Budgeting is a means to an end. Usually you start budgeting to save money or to achieve a specific goal. As you become more efficient at maintaining a budget you will have a surplus. A financial counselor or planner can help show you how to make your money work better for you.