Budgeting is the first step toward financial planning. It includes a series of questions about how you spend your hard-earned money. And being accountable for your inflows and outflows is a healthy exercise for strengthening your ability to save and plan for your future.
Having a budget helps us live within our means and avoid spending more than we make.
While it might take work at first, in the long run, budgeting will secure you the financial stability needed to acquire wealth, and equally as important, peace of mind.
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3 Good Reasons to Make a Budget
The importance of budgeting varies according to many factors. While not everyone needs to budget equally, there are essential situations to consider.
- Get Your Finances Organized. If your financial recordkeeping is a mess, you need a budget. You need to understand what the inflows and outflows are that got you into this mess and start to keep track of where your funds are going.
- Maintain Financial Goals. Create a realistic goal by living and subscribing to an initial budget. You can derive a true-to-life financial plan by learning what is affordable and what is not.
- Plan for Retirement. Everyone needs to budget for retirement. Paychecks will inevitably stop, and you will need to rely on Social Security, investments or a pension. The question is, how much do you need to retire? The answer is the amount required from your assets each year to live. And the only way to get that answer is by budgeting.
Setting a Budget Is a Good Habit
Creating a budget is always a good idea. But being accountable for your finances and spending habits may be daunting to some, while it comes naturally to others.
Keeping in mind that not all budgets are equal, here are some guidelines to get you started. The goal is to understand why and how to budget according to your profile.
Why You May Need to Create a Budget
It is wise to create a budget in various circumstances. Some of the top reasons to manage your finances are to:
- Stay out of debt.
- Understand retirement finances.
- Save for a significant expense.
- Understand what you can afford.
- Track where you spend money.
Those Who Do Not Budget
There are two distinct categories for those who need to create a budget and those who don’t. While both groups may benefit from financial accountability, the first group – those who are burying their head in the sand – truly need a budget. The second group – those who are considered affluent – could probably get away without one.
Those uncomfortable getting real with their finances generally have similar concerns. They often have much debt, are embarrassed by their lack of savings, may have a spouse who overspends, or, as the adage goes, may think “ignorance is bliss.”
On the extreme opposite end are the super-wealthy individuals who don’t have to budget. This group earns enough to save and spend at their discretion, has enormous assets, or has an inheritance. Thus they are not concerned with their current finances.
Where to Begin When Creating a Budget
Creating an effective budgeting strategy depends mainly on the individual. Some create spreadsheets and update them daily with what and where they spend, then reconcile these worksheets monthly to stay on track.
There are also budgeting software programs, such as Quicken or Mint, or proprietary ones created by financial advisers to attach credit cards and bank accounts. These services track and categorize your expenses, and although intuitive, they still require the human touch to assure accuracy.
Some people budget by setting up multiple bank accounts for designated monthly expenses, such as personal, home and savings. They pay into these accounts every pay period. Others used the very simple envelope budget method.
Then there is the automated budgeter. This person knows what they need to put aside for retirement and college savings and stays on track monthly and annually. From there, they spend the rest.
Next Step Is Financial Planning
Now that you have a general understanding of the importance of creating a budget, your next step is to make a budget yourself! You may also consider seeking the help of a seasoned financial planner. This person can help you invest the money you save, so you have more money over time.
The goal is to live your best life within your means so that when it comes time to retire, you may continue to live the quality of life you did while working. The best motto for retirement is to do so in wealth, health and happiness.
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