A budget is an essential component of one’s finances. A cash flow or financial budget plan can help tell your money what to do instead of asking where your money went. The “B” word unfortunately has some dreadful connotations. You might feel as though a budget will put you in a financial straightjacket or you may have tried a budget in the past and failed. But the bottom line is that your budget and cash flow statement are the bedrock of your personal financial success.
Here are some important reasons for creating a budget:
- A budget establishes priorities and is proactive, not reactive to financial problems.
- A budget can remove financial conflicts within your family.
- A budget provides discipline and helps you from overspending and impulse buying.
- A budget will help you meet your financial goals and give you peace of mind.
A budget can remove considerable stress from your life. We cannot control the financial markets, but we can control how we spend our money. The budget shows how much money is coming in as income and how much money is going out as expenses. Your income is your paycheck or any other extra money you get. To budget your expenses, the key is to put a name to each dollar so you know where your money is going. The purpose of a budget is to allocate every dollar that you earn into a spending category. When complete, your total income minus your total expenses will equal zero.
Below is an example: Total Income: Salary per month = $4,000
Total Expenses: Rent + Food + Clothing + Entertainment + Savings + Other = $4,000
DIFFERENCE: $4,000 $4,000 = 0
On the budget you will place your projected expenses for each category. Adjust each one until your income minus your expenses is zero. Later, as you actually pay for items or services in each category, track the actual expenses and place it next to your projected. You can use a finance program like Quicken to help you track your expenses. There are helpful apps such as Mint, PocketMoney and EasyMoney that you can use for your smartphone or tablet. The goal here is to not go over your projected expenses. If you do, then you must subtract projected and actual expenses elsewhere. Remember to keep your priorities in order. It is foolish to cut back on savings or rent to purchase another plasma screen TV!
After setting up the initial budget, it is important to adjust your budget on a monthly basis. It is important to be in agreement with your family in order to align all family interests and focus on the budget. Collective purpose is much more powerful than individuals working on their own. This will help everyone be accountable to how money is spent.
Another common method of a budget is called the “pay yourself method.” Some people have found this method to be easier in establishing their budget since tracking every expense may not appeal to them. Instead of allocating each dollar to a category, you allocate a percentage of your income to each category. Below is an example:
Income: 100 percent
Expenses Short/Mid-Term Savings:10 percent
Long-Term Savings:10 percent Tithe/Charitable Giving: 10 percent
Remaining Expenditures: 70 percent
This method works best when you have the discipline to give, save and spend toward the right categories. You have the flexibility to spend on different items within a category as long as you don’t go over.
Regardless of which method you choose, making a proactive effort to spend money wisely is critical for financial independence. Keeping a budget will help you and your family reach your financial goals and provide peace of mind.