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Many people will associate budgeting as a necessity only for those who are struggling with financial stability; however, creating a budget can be extremely beneficial for any individual. Obtaining solid budgeting skills ensures liquidity, assists in handling debt, and allows one to build their savings. To see these results and create an efficient budget, it is necessary to understand why it is important to have a budget, how to create a basic budget, and how to successfully maintain a budget.
Understanding the Importance of a Budget
Understanding the importance of a budget is not only essential in its creation, but is essential in maintaining it. Without interpreting the benefits and potentials budgeting can provide, there is no reason in practicing this financial skill.
On that note, an important reason to have a budget is to obtain a basic understanding of where one stands financially; this includes how much one is spending and how much one has to spend. By keeping tabs on this information, a comprehensive financial plan can be created and can be used to achieve financial goals, such as paying off debt, saving for luxuries, or creating room for extra expenses. This can reduce stress with any individual (“5 Reasons You Need a Budget”).
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Additionally, creating a budget is important because it allows one to spend according to priorities, as well as potentially build wealth. Laying out all of the expenses an individual acquires overtime can provide them insight on finances that are overall unnecessary and allow them to focus using the money on more beneficial expenses. For instance, a $5 coffee can come off as a relatively low expense; therefore, an individual who gets cappuccinos as often as three times a week may not realize how much they are spending on coffee overall. By using a budget, these seemingly harmless expenses can become more noticeable in how financially threatening they can be.
In this example, if the individual were to track their expenses for a month, they would realize that they spend approximately $60 on coffee every month. Noticing how much money is being spent on unnecessary expenses can allow the individual to break negative spending habits and use the newly excess money for priorities such as paying off loans and mortgages, saving for retirement, or creating emergency funds. Additionally, cutting back on unnecessary expenses would ultimately build wealth for the individual. Once debt is settled, the individual could continue to use their budgeting system to build savings with their excess money. As savings and possible investments build, the individual would obtain more wealth overtime and put themselves in a stable financial situation (“5 Reasons You Need a Budget”).
Another one of the most beneficial and important reasons to develop a budget is to reduce the stress that accompanies finances. Frustrations occur with financial insecurity and instability; individuals worrying whether or not they can afford purchases and the aftermath of making a purchase that they could not afford can lead to high levels of stress. A budget provides predictability and an approximate idea of where one stands financially. It permits individuals to make additional purchases if the they are confronted with them because the status of whether they can afford the expense is established within their budget. Budgeting also allows individuals to make room for the expenses they desire. It provides financial insight for individuals and reduces the stress of the uncertainty that can occur if one does not trace finances (“5 Reasons You Need a Budget”).
Creating a Basic Budget
In order to develop an efficient budget, one must learn how to create a basic budget; once a basic budget is established, techniques can be applied to make this financial plan more effective. A budget should be prepared realistically and honestly. It will ordinarily be built from the incomes and expenses of previous months; this data will allow the budget to have approximate values for how much money is coming into and leaving a household. If one does not keep receipts or track income, it is also popular to track the next coming month and establishing an ideal budget based off those values. To start a budget, one must identify how much money is coming into their house hold and how much is leaving.
To determine cash outflow, one would create a list of current and upcoming expenses; these include, but are not limited to: bills, groceries, clothing, entertainment, and housing. The next course of action is to categorize these expenses. This can be done by either categorizing the expenses in needs, somewhat needs, and wants or by common categories, such as bills, food, going out, etc. with additional subcategories if preferred. (For instance, splitting the food category into groceries and food bought at a restaurant.) By saving past receipts and looking at any other previous transactions, one can create a rough idea of how much money should be set for each category and assign appropriate values. A beneficial category that is also worth noting is a saving or “emergency fund” in case an unexpected expense emerges (“How to Make a Budget”).
To determine income, it is best to begin listing all earnings that are accumulated monthly, observe how much they bring in, and calculate the total income from those values. Sources of annual income include, but are not limited to, salary, commission, bonuses, interest income, and dividend income (“Investing for Me: The Science of Investing.”). If the amount of income varies from month to month, an average of these values will be used as a representation of income in the budget; the standard rule is to base this average on the amount of income attained over the past six months. An alternative to using the average value of income is to use the lowest monthly income over the last six months (“How to Make a Budget”).
After income and expenses are determined, the values of each are compared. If the expenses listed in the budget add up to be more than income, it is wise to overlook all of the expenses once more to see which categories can be adjusted to require less money or be completely eliminated. If the amount of income prevails the expenses, there will be an excess of money. This overage can be put into savings or invested, allowing an increase in wealth. This will reduce stress and help prevent issues with debt.
Maintaining a Budget
Once the budget is created, it is the responsibility of the individual to manage their expenses and adjust their spending behavior to the budget they have created; however, this is a change that can often be difficult. Many individuals return to bad spending habits overtime. Fortunately, there are many tactics that have been consistently suggested to assist in maintaining a budget such as creating a financial goal and finding a system that works best for the individual using the budget.
Establishing financial goals is a widely embraced tactic in maintaining a budget. It serves as a motivation, giving the individual something to work for; examples include buying a house, planning for retirement, and increasing sources of income. Similar to a budget, a financial goal should be prepared realistically and honestly. Once a few goals are set in place, the individual would identify short term goals from long term goals and establish how much they need to save as well as reasonable, realistic achievements (pay set amount of dollars per week/month) to accomplish this overall goal. It is also important to prioritize financial goals if an individual has many in place. This will get more urgent objectives taken care of more quickly (Mack).
Additionally, another strategy to aid an individual into maintaining a budget is to find a system that works best for them. There are many different methods to budgeting that will work better for particular people. A classic system for organizing a monthly budget is known most popularly as the envelope system. This is a method that is accomplished by labeling envelopes with different budget categories such as food, gas, entertainment, clothing, and miscellaneous expenditures. Each category will have a set amount of cash that is placed in the envelope and serves the budget amount for that particular expense for the month. The visual representation of cash makes the system simple to follow. A set amount of cash is the limit for each specific category; once the money is gone, there is no more funds for that expenditure until the following month. The amount of cash in the envelopes easily allows the individual to track how much they are spending and how much they have for the rest of the month while staying within their set budget (Folgate). Another familiar system in known as the 50/20/30 plan. This method is well liked for its simplicity: 50% of the income goes towards necessities, 20% goes towards long terms savings, and 30% is used for whatever the individual would like to. This method is idealistic for those who are beginning to budget; it offers a starting ground for them to build their budget (Berger).
Conclusion
In the end, budgeting is a skill that is very valuable to practice and can be extremely beneficial for any individual if done right and taken seriously. By continuously using a budget to its fullest potential, it can be used to deplete debt and augment wealth. This is permitted to happen once one understands why it is important to have a budget, how to create a basic budget, and how to successfully maintain a budget.
Analyzing Sources
Of the sources I used to write this paper, I feel as though they all did a sufficient job of covering each topic I used them for. My eHow source absolutely covered the largest portion of my paper, providing vivid information of how to create a basic budget. Additionally, the article “5 Reasons You Need a Budget” was a great source that had a wide coverage in my section of understanding the importance of a budget. If I had to choose the sources that provided the best information, I would most likely choose these articles because they were more valuable sources for my content.
