The days of economic prosperity have given way to the need to be frugal. Many families are finding that they can’t survive if they don’t have some way of knowing where their money is going. That means creating a budget.
In its simplest terms, a budget takes into account income and compares it to expenses. If expenses outweigh income, something must be done to equal both sides before expenses get too great to be managed.
A budget can be broken down into separate budgets, each interconnected. You can have a food budget, a household budget, a savings and investment budget or a college and retirement budget. What remains after the money covers all expenses may then be used for your luxury spending budget.
Few people enjoy creating a budget as it does get complicated. The more members in the family, the more important it is to track those expenses.
There are a number of reasons why a budget is necessary beyond just listing income and expenses. They are:
An Income and Expense Recorder
Once you know what your income is, you have the foundation to build your fortune. But you’ll need to list all your expenses first. They include necessary expenses such as what you pay for your utilities, your insurance, mortgage and taxes. You need to list how much you spend on food by putting down the latest figures from your receipts. Then you need to list those expenses that go toward entertainment, movies, magazine subscriptions, books and dining expenses. All that loose pocket change may seem unimportant but what you spend on the daily coffee must to be included.
Adjusting the Books
If you’re like the average man or woman, the exercise of listing income and expenses will likely lead to sobering reality. When done early enough, you can make adjustments so both sides equal out before you experience the first sign of trouble. Preferably the income outweighs expenses. One of the important aspects of a budget is that it reveals those small leaks that add up to a loss of money over time. You can see what you can cut be that won’t significantly reduce your current standard of living.
Budgets Set Priorities
You can’t become wealthy unless you have a goal and a plan to achieve it. A budget helps you plan for your future by outlying the steps you need to take today to get what you want tomorrow. It all depends on what is important to you. That doesn’t mean that you need to become a miser of money. If one of your priorities is to replace your old car, you can include it in your budget and determine how much of your income you can set aside for it. Doing so means less cost of borrowing the money. The lower the loan, the less interest you pay.
A Blueprint for Wealth Creation
You can’t plan for a prosperous future if you don’t know how much your income is and how much of it you can save. The general rule is to put aside 10% of every dollar and put it into long term investments that draw the highest interest rate. That money needs to go where it’s not easily accessible. To do that you need to know exactly how much you make and from what sources your money comes from.
The Budget as an Incentive to Save
Watching your budget working for you gives you peace of mind and a great deal of satisfaction. The more you manage to save, the greater incentive you have to continue saving. You can’t find that same level of satisfaction from buying a luxury item that eventually wears out and gets disused fast. Those who have budgets are happier and have an increased sense of self-worth.