If you find yourself worrying about money problems, the best thing you can do is to sit down and make a simple personal financial budget to record your income, expenses and savings. You will know exactly where your money issues lie and can then work on a plan to fix your financial situation. This is because a personal budget looks at where your money comes from and where it goes, making it easier to control the flow and curb wastage. This is but one of the many benefits of budgeting your income and today we take a look at the various advantages of personal budgets.
If you haven’t a clue as to what budgets are and how they work, you’re not alone. Luckily, the process is pretty simply. All a personal budget requires is a record of your income and expenses, so you can figure out how much you are spending, That’s a basic requirement, and if you really wish to understand your spending habits, you can go ahead and create a highly detailed budget that records a variety of expenses, incomes, investments, and so on, provided so can do so without sacrificing too much time. Check our short guide on how to setup a basic budgeting system for yourself. Now let’s move on to the benefits of creating a personal budget.
1. Budgets help solve money problems
This may seem too simple a solution to be viable, but the truth is, budgeting is the first step in your journey towards financial welfare. Attempting to manage your money better without making a financial budget is like trying to swim without getting wet. And just as in swimming, it is never too early or too late to start taking control of your finances and begin saving. If you feel anxious about whether you’re earning enough, saving enough or spending your money sensibly, make a personal finance budget before you do anything else.
The reason financial advisers and the overall financial community give so much importance to budgeting one’s income is because the first step to financial independence involves understanding the flow of money through your wallet, which is what a budget explains. Once you’ve figured out your spending patters and mistakes, if any, you can consciously decide how to spend the money, which bring us to our second point.
2. Personal budgets help control your money
As mentioned earlier, budgets are plans that accounts for every dollar you earn during a week, month or even a year, and every dollar you spend, invest and save during that period. Overtime, you will notice spending and saving patterns emerge that depict your lifestyle, which you can use to support your money management efforts. For instance, your personal budget will reveal if you have been spending too much in a certain expense category (perhaps a high-maintenance car, groceries or entertainment) or ending up deeper and deeper in debt every month. You can then make small changes to your lifestyle that will allow you to spend money in a more frugal way, so you don’t end up wondering what happened to your paycheck at the end of the month. A well kept financial budget will allow you to gain control of your money, rather than having your money control you, which is why financial budgets are also known as money plans.
As Dave Ramsey puts it, “A budget is telling your money where to go instead of wondering where it went”. To figure out how much money should be allocated to different expense categories in order to spend the money carefully, there are a few simple budgeting guidelines available:
- 80/20 budget: you can spend 80% of your income on needs and wants, while the remaining 20% is saved.
- 50/30/20 rule: 50% of your income goes for funding necessities, 30% can be used on discretionary items (it can be whatever you want) and a minimum of 20% is saved,
- Pay yourself first: you must set aside money as soon as you receiving your paycheck for the purpose of your savings (this could be 10% of your income or 40%, whichever suits you) and you can spend the remainder for various needs and wants.
3. Budgets keep you updated about your financial situation
A well-kept budget will keep you aware of your real financial situation at all times so you don’t find yourself wondering whether or not you are saving enough or whether or not you can afford something presently or in the future. Retirement planning is a major concern for us all, especially as we reach our retirement age, and we often wonder if we have enough funds set aside to life comfortably as we age. A personal budget helps present an accurate snapshot of your overall financial achievements and highlight areas of improvements so you are always familiar with your current financial position.
4. Budgets help you meet your goals
Not only to personal budget clarify your financial situation, they also help you improve it if you incorporate your financial goals within the budgeting system you follow. Every budget has an ‘Savings’ category that ensures you save a portion of your income each month. If you fail to save money during that period, for whichever reason, your budget will simply highlight the fact for you, so you can attempt to save the following month. That’s not all. You can make room in the budget for additional categories that are tied to your short term and long term goals, such as:
- Retirement goals: 401(k) contributions and funds for other retirement plans,
- Planned vacation or purchase: sinking funds, vacation funds, car funds, etc.
- Future goals: education fund, wedding fund, etc,
- Debt repayment: mortgage payments, credit card bill expenses, car lease expenses, etc.
- Emergency fund
All these goals and targets helps you plan for the future and forecast your uncertain financial life to a great extent, ultimately helping you achieve financial independence.
5. Budgets help limit wastage and maximize the value of your money
A personal budget that is well-maintained will, in the long run, help you reduce excessive spending as well as wasteful spending that may be taking place. For instance, when you record your expenses for the month, you may notice that a disproportionate amount of your income goes to transport costs. You may realize that even you love your car, it is too old to run smoothly without monthly repair trips to the car mechanic, or that the car runs well on its own but gives you terrible mileage, causing your gasoline bill to surge. The solution, you may decided, is to replace it with a better car or find alternative, low cost mode of transport, such as public transport or carpooling. When you reduce and cut out the financial wastage from your life, you will have more money to invest, save, payback debt or make purchases that maximize the value of your money and improve your net worth.
If you are struggling with money, it is clear that a simple financial budget will help you figure our a solution. However, because the advantages of personal budgets are significant, one should consider making them even if there are no financial worries to address because, if done correctly, the result of a financial budget could be anything from better control over your spending to better planning for the future, and that is something we all need.
If you feel budgeting itself is a tedious and cumbersome job, there are ways to make it a fund activity so you can get it done regularly.
between paychecks. Plus, there are different ways you can make it a fun activity.
Further reading: Budgeting Basics – Budgeting Tips by Investopedia