There are numerous good reasons why everyone should create and stick to a budget. However, statistically speaking very few American’s utilize them. Today we would like to highlight a few key benefits creating a budget can provide as well as provide an instructional video and free template on how to create your first budget.
First, a few of the “Whys”
It Helps Ensure You Don’t Spend Money You Don’t Have. If you never create and stick to a budget, you will never see if your expenses outpace your income, or more likely, you will have no idea how much more you are already spending VS what you take home.
It Helps Lead to a Happier Retirement. Budgets are a major tool in planning for a future retirement. If you do not have a budget, you will never know exactly how much you have available each month to put towards savings, specifically retirement savings through your companies 401k plan. However, a budget can be the second most important step to retirement in addition to saving enough. It can show you exactly how much money you are going to need in retirement. It’s impossible to know how much you to save if you don’t first figure our how much you’re going to need.
It Helps You Prepare for Emergencies. If you are still within some of the first steps to getting your financial house in order you may not have created your emergency and contingency funds yet. In this case your budget should include a monthly expense to build your $1,000 emergency fund and then your contingency fund which consists of at least three to six months’ worth of living expenses. Guess what a budget also does? Let’s you know what “three to six months of expenses” are!
It Helps Shed Light on Bad Spending Habits. Building a budget will force you to take a close look at your spending habits. You will immediately notice what areas you are overspending in, what areas your expenses are higher than they should be compared to professional guidance and probably what spending is on things you don’t really need.
How to Make a Budget
There are a lot of good/free templates you can use to fill in the numbers for your expenses and income. For some an old-fashioned pen and paper to budget your money may be more in your comfort zone. For others it may be easier and more efficient to use an excel monthly budget spreadsheet or a budgeting app like Mint. These will all contain designated fields for income and expenses in various categories like housing, transportation, food, utilities, and savings. The major steps will include:
Gathering Your Financial Paperwork. Gathering things like bank statements, recent utility bills, paystubs, credit card bills as well as mortgage or auto loan statements will be imperative.
Calculate Your Income. This is probably the easiest step considering most of us know what we make, just not what we spend. Most budgets will ask for net income (take home pay after taxes, social security withholdings, health premiums, etc.)
Create and categorizing a list of Monthly Expenses. This is the budget, and you’ll want to be as precise as possible and try and account for all expenses for what you plan to spend for the next month. Still try to understand no budget is perfect and there will always be some changes and variables. For example: during the summer you AC bill will most likely be higher and in the winter your heating willing increase. Keep these things in mind. Therefore, you must do a new budget every month.
Compare. In any budget, the last step after you have gone through every section and accounted for every expense will be to compare these with your take home pay. Obviously, your income and expense columns should be equal. If your budget is less than your income this provides an opportunity to go back through the budget and increase areas such as savings, dedicating cash flow to pay down debt, increasing some form of discretionary spending. If your expenses are more than the amount of money you make you are spending beyond your means and will have to reduce or remove some expenses.
Starting a budget may seem tedious at first but the benefits listed here are just the tip of the iceberg. Seeing where you can free up cash flow for yourself, for your family, to eliminate debt and/or to save for your future dreams will give you more financial freedom than any other program or technique. So, what are you waiting for? Time to start budgeting!