Financial security is an important aspect of human life. It gives a personal feeling of confidence and mental peace, stemming from the assurance that the future needs of you and your loved ones are taken care of.
If you want financial security for yourself and your family, preparing a budget is a good place to start. Here are few reasons to show you why you need a proper budget.
Gain Control Over Spending
When you manage personal financing without a proper budget, you have nothing to hold back your spending. You might have a rough idea of how much you can spend each month, but it is not easy to control your spending habits without accurate numbers.
Without a budget, you will find it difficult to correlate your daily spending to a less than an optimal financial situation. For example, you might think there is no big deal in eating outside once a day and spending $20.
However, when you sit down to count your monthly expenses on outside food, you might be shocked to know you have spent $600 on eating out. Those seemingly insignificant takeouts can eventually add up to your spending.
In simple words, a proper budget is essential to keep an eye on your spending habits and understand the impact of small, unnecessary expenses on your budget.
Helps in Achieving Financial Goals
When you think of personal financing, it is generally about earning, spending, saving, and investing. An earning individual can have short-term, mid-term, and long-term financial goals.
A short-term financial goal can be buying a computer, new television, or a family vacation. A mid-term financial goal can be paying off a credit card balance or saving for a down payment on a new car.
A long-term financial goal spans over five years or more, and it can be anything like buying a new home or saving for your child’s college education.
When you are creating a budget, you need to mention your financial goals. You need to consider your earnings and monthly expenses and plan to save the maximum amount of money to put aside. Setting a timeline for your financial goals is easy. However, the real struggle is achieving financial goals.
To achieve your financial goals, you need to stick to your budget plan. Also, you need to have a clearly defined process to achieve maximum savings. You may have to set boundaries of your financial behavior to ensure your savings and spending stay on track and achieve your financial goals as per the set timeline.
Help Get Out of Debt
Taking a loan for purchasing a house or car is normal financial behavior. However, loans come with the big responsibility of timely repayment. If you fail to make timely repayment of your loan, it affects your credit score adversely. Without a proper budget, it would be hard for you to manage the repayment of your loans.
A budget puts you on the path of realization. It helps you understand how much you earn, your average monthly expenditure, and how to manage repayments.
With a proper budget, you can ensure you have enough money every month to make timely repayments. All this allows you to get out of debt and enjoy the financial contentment of being debt-free.
Now that you know the reasons to make a proper budget, you need to know how to make one. Here are few tips to make a proper budget.
Find Out Your Net Income
The first step in preparing a proper budget is identifying all sources of income and the amount of money coming in every month. Many people often think about their total salary when they think about the amount they can spend.
However, that is not proper budgeting. You need to consider your grocery expenses, utility bills, and social security taxes. Deduct these amounts from the total monthly income in your monthly budget worksheet. The number that you receive after all deductions is what you must use to prepare a budget.
Track Your Spending
You need to categorize and track your spending so that you can make adjustments. Tracking your spending allows you to know where most of the money goes.
Once you analyze your spending, you will be able to decide which ones are essential expenses and which are unnecessary expenses. It will help you cut your spending and save money for the future.
You can start by listing your fixed expenses like mortgage or rent, car loan payments, or other loan payments. Next, you need to list variable expenses like entertainment, gas, groceries.
The variable expenditure is an area where you can cut expenses and save more money. For example, you can cut down your entertainment expenditure to put some extra money in your pocket.
You need to set your short-term, mid-term, and long-term financial goals and mention them in your budget. Short-term goals should not take more than a few months or a year to achieve.
Make a Plan
After compiling fixed and variable expenses, you will get a fair idea of how much you will be spending in the coming months. The fixed expenses can be calculated accurately, while your past spending habits can determine the variable expenses.
You might have to further break down your variable expenses to determine which ones are essential and which can be avoided entirely. It is important to prioritise your variable expenses.
For example, if you drive to the office every day, gasoline costs are essential expenses that will figure in the “Needs” list. However, a music subscription can be put in the “Want” list, meaning you can cancel it to save money.
Adjust Your Habits
Just making a proper budget will not help you build up funds or fulfil your financial goals. You need to adjust your habits to ensure you cut back expenses wherever and whenever possible. For example, you can skip a movie trip to a nearby theatre and enjoy a movie with your family at home.
You can also reduce eating food outside and instead learn to cook healthy meals at home. You can find hundreds of vegan, vegetarian and non-vegetarian recipes online, and learning them only takes a little effort.
Keep Checking In
Budgeting is not a one-time gig. You need to prepare a budget every month and review it at the end of the month to see how you performed. For example, were you able to cut variable expenses?
If you are able to cut down on your variable expenses, it is a sign that your budgeting is working well. However, if you find that the variable expenses remain the same, or worse, have increased, you need to be more disciplined next month.