There is no personal or family financial plan is truly complete without a budget. Budgeting ranks right up there with savings, investments, wise spending, and paying your bills on time.
Some financial experts suggest that not having a budget is kind of like driving around in unfamiliar territory with no map or GPS. You may think you know where you’re going, but you’re never really sure and can easily end up lost – or worse, lost and out of fuel. A budget is a roadmap that not only keeps you headed in the right direction but tells you a lot about your finances.
Let’s take a look at some of the other important reasons why budgeting matters.
It Provides a Realistic Perspective
For some people, a budget is a rude awakening as you realize how much spending you do each month compared to your income. And you may discover how much “unnecessary” spending you do, i.e., eating out, buying things you don’t need, and more. A budget will provide you with the insight you need to curb that kind of spending while saving more each month.
It’s difficult to set (and reach) financial goals without a budget because your budget will give you an idea of what some reasonable goals are and how long it will take to reach them. Say you want to buy a new laptop – how many months should it take you to save for the one you have in mind, and how much do you need to save every month? A budget will help you stay on track as you strive toward your goals.
There are always going to be unexpected expenses in life – a new roof, a major car repair – having a budget available allows you to make adjustments to your spending and help you get back on track.
Most of us desire a retirement that’s not only happy but also financially secure. A budget helps you decide how much you can set aside each month for your IRA, 401(k), or whatever retirement fund you’ve set up.
Spending unwisely can lead to a heavy reliance on credit cards to get you through each month. Living outside your means while using credit cards is detrimental to your credit score. A poor credit score will make it more difficult for you to get approved for a new car loan, a mortgage, or a business loan. Using a budget that reflects your means can help you cut back on expenses and live less reliant on credit cards.
How to Get Started
A basic budget should include home expenses, transportation costs, various bills, unexpected costs, and saving for the future (whether it’s retirement or your child’s college education).
Your home expenses, which some experts say should be no more than 30 percent of your budget, including your rent/mortgage, household furnishings and equipment, household operations (such as a lawn service), and housekeeping supplies.
Transportation costs include your car payment, insurance, and registration but also gas and repairs. Meanwhile, the consensus is that food shouldn’t take up more than 15% of your budget.
Bills could come monthly or biannually, but it’s important to include them as a line item in your budget. Estimate monthly costs of utilities, medical expenses, health/life insurance, etc. for a balanced monthly budget.
Unexpected costs can be things we’ve already mentioned, like a new roof of new braces for your child, but also prepare you for emergencies and unknown, irregular expenses.
While the notion of a “budget” can seem scary, it simply lists your income and expenses while providing a clear picture of your monthly finances. By managing your finances carefully, you’ll spend more wisely and have money left over to save after expenses.