Managing bills and expenses isn’t exactly the easiest thing in the entire world. That said, it’s really not the most difficult thing either. It’s just that growing up the vast majority of us weren’t taught the reasons for preparing a budget and tracking your spending.
Without the basics of personal finance to prepare them, millions of individuals and families are left without much guidance on the best practices of how to manage bill payments, debts, and budgets.
It’s easy to understand why more people don’t budget. It makes you take a hard look at your finances in a way that is comfortable. But the opportunities it opens up can transform your life.
For example, a budget can…
- Help you learn how to use money wisely
- Help you put more money back in your savings account
- Make it easier to enjoy your life more since you’ll stress about money less
Frequently asked questions about budgeting
A budget is an estimate of how much you plan on earning and spending within a set period of time, like a month. There are a few types of budgets, like the 50-30-20 budget, the zero-based budget, or the cash envelope system.
When you prepare a cash budget you can see your overall income and expenses which can present you with choices you didn’t know you had. It will stop you from overspending, getting into debt, and leaving you with bad credit.
Because budgeting forces you create an actual plan around your monthly spending. As a result, you’re far less likely to overspend since you can see the overall impact of individual purchases. This enables you to focus more on paying down debt or investing because you understand what money is available to do those.
Because budgeting takes effort. Scrutinizing your finances at the detail required to create a budget isn’t easy. It can be extremely overwhelming, which makes it easy to put off. But that’s why having a budget is important. You have to treat your finances like a small business. Budgeting by itself isn’t exciting. But the opportunities it opens up are.
What are the steps for preparing a budget?
Time needed: 30 minutes.
Learning how to budget is easy, it just takes a little bit of time to get started. The process goes like this:
- Identify your monthly household income
Write down how much money is coming in every month. This should include all of your household income e.g. paychecks, financial support, etc. Only include your actual take-home pay which is your income minus taxes and benefits.
- Identify your monthly payments
You’ll then need to write down how much money is going out every month. You can do this by collecting all your monthly bills and creating specific budget categories. The categories would be things like a house, utilities, transportation, insurance, credit card bills, etc.
- Categorize your typical expenses, like groceries
Create categories for items where you don’t have set monthly bills, like groceries, clothes, home, and car maintenance. Since you don’t have a specific amount due, you’ll need to estimate your monthly spend. Don’t worry about getting it perfect. You can adjust these monthly.
- Identify your monthly cashflow
Finally, subtract your total expenses from your total income. Whatever amount of cash is left should go to paying down any debts you have. Once you are debt-free you can start using it for saving and investing.
Why you need a budget
A budget helps you save money so that you can do thing such as:
- Pay off debt: Get rid of those car loans, credit card debt and student loans
- Become better at managing your money: This is a skill that will help you for the rest of your life.
- Have more money to spend on what you love: We work so we can make money to spend on ourselves and our family. But often we end up spending it all on paying interest on the debt. With budgeting, you can get back to spending on the things that matter to you.
Reasons you need to prepare a budget
1. Because you’ve tried not preparing a budget
You already know what happens when you don’t create a monthly budget or you wouldn’t be looking on the internet for advice on how to do it. What’s the harm in learning how to make a budget?
Kidding aside, a lot of people resist learning how to create a budget because it requires them being honest with themselves about their need for budgeting. When you write your spending habits down on paper, you expose a TON of bad habits. That can make some folks wary of trying it. Good thing you’re not like other people.
With budgeting, you won’t fall prey to short-term unnecessary costs that temporarily pique your interest. You avoid spending on items that don’t contribute to your big-picture financial goals, like buying a car, house, paying off your student loan, or making financial investments.
With a budget, it’s easier to really work towards these necessary and wise monetary investments.
3. Hey honey, when did we sign up for this?
Have you ever looked at your bank statement and said to yourself “When did we sign up for this membership to the jelly of the month club? I don’t even like jelly!”
With a household budget, you essentially are doing a personal audit every month to reconcile all your expenses, so no more sneaky subscription bills getting by.
4. No more feeling guilty about spending money
Budget planners don’t tell you to not spend money. They give you guidance around how much money you have to spend so that you can be more intentional in buying what you really want. Just make sure you keep a tab on the % of the money going to the categories that matter to you. For shoes and clothing, a good personal finance rule of thumb is around 3% of your monthly spending.
So go ahead and buy those new shoes, but make sure you have checked your budget worksheet first!
5. Puts you in the driver seat
Sometimes, we may feel like a victim of our money and bills, caught up in a never-ending payment cycle. A big advantage of a budget is that you can be intentional about your money. It gives you insight and control to start paying yourself first.
Managing your money properly saves you the stress of suddenly having to adjust to a lack of funds or prepare for an emergency expense. You can decide what you’re willing to sacrifice in the short-term for the long-term.
It is said that with budgeting, you control your money; your money doesn’t control you.
6. A huge sense of accomplishment
Learning how to budget money wisely is not easy. It takes a lot of dedication.
According to a Gallup poll, only 1 in 3 Americans creates a monthly budget. Now compare that against a recent MarketWatch survey that found over 50% of American’s live paycheck to paycheck. You can infer from those statistics, that while the majority of Americans are broke, only a small percentage take the next step every month to create a budget to help them change their situation.
This is why you should be extremely proud of yourself for seeing it through month after month. Budgeting is usually the first step in changing your finances and the success you have becomes a compounding effect in other areas, like paying down debt or investing.
7. No more overthinking!
How much mental energy do you invest thinking about what you can and can’t buy?
When you create a monthly budget plan, you front-load all of that analysis to the beginning of the month, and then you go on autopilot, executing that plan throughout the month.
Goodbye juggling bill payments!
You can also kick it up a notch by using a budgeting technique referred to as the cash envelope system. In a nutshell, this is where you withdraw cash once a month to cover all your budget categories and use envelopes labeled by budget categories to manage your expenses. If you don’t have money in the envelope for it, you can’t buy it.
8. Budgeting makes you acutely aware of your spending habits
If you want to improve your personal finances, you’re going to have to get up close and personal with how you are spending your money. You need to understand the different types of debt you have, how much you owe, and what they are costing you every month in interest and fees. Budgets put all of that on display, in black and white, every month.
9. Gets you out of debt WAY, WAY faster
A proper budget enables you to aggressively cut expenses, which means you are going to have a lot more money to apply to your debt pay-down strategy. Don’t limp along making minimum payments for years. Get in the fast lane!
10. More savings = More money
The more you save, the more you have to pay down debt. Then once a debt is paid off, you increase your monthly cash flow by putting the monthly payment right back in your pocket!
11. Save and invest more!
Guess what you can do with more money? You can begin investing in yourself and your future. This could mean you throw more money into your emergency fund, start ramping up your retirement, save for a vacation, or even start your investing for your non-retirement goals. Who knows, maybe you find yourself in the position where you can even retire early.
12. Reduced stress
A recent report from the American Psychological Association found that over 62% of Americans report being stressed about money. Life is way too short for that many people to be that stressed.
13. Increased sleep
According to the National Sleep Foundation, money stress has a huge impact on the quality and amount of sleep people get. I’m a huge fan of sleep. And with a little kid in the house, I’ve got enough things making it hard to have a good night’s sleep.
14. Better mental health, and more energy
Debt is tied so closely to personal and mental health that the emotional effects of being underwater are known to induce fear and bring upon depression and anxiety disorders. If you are feeling any of these things, please talk to someone. Sharing your feelings with others can have a cathartic effect and relieve some of the emotional pressure you feel.
15. The family that saves together plays together
Family budgeting and savings is a fantastic way to bring families together around a common goal. It gives them a sense of responsibility and helps reinforce positive behaviors that will benefit them throughout their entire lives. Tell the kids they can go to Disney next year if they help the family budget for it. It gets them engaged and invested so they have a reason to help and contribute.
16. Happy marriage
No one likes arguing about money. Especially when it’s with the person you share your life with. According to www.marriage.com, financial stress is the #2 cause of divorce.
Knowing the importance of planning a home budget, how can you not do everything in your power to reduce the opportunities for money fights?
17. Improve your overall quality of life
Imagine life with more money, less stress, more sleep, fewer arguments, more savings, less guilt, and more positive relationships. Sounds pretty amazing right?
We all want to retire one day, and be able to step away from the stress and demands of the work cycle. That doesn’t come without intentional planning, you need a budget. With budgeting, you have to divide your money into categories of expenditures, savings, and retirement investing, forcing you to be more aware of which category is taking more of your money, so
At the end of the day, If you don’t like what you see, you decide where the money goes, and more importantly, where it doesn’t. While budgeting isn’t an end-all-be-all for your financial woes, it gives you a ton of advantages.
Do you have other reasons for preparing a budget? Let us know by leaving a comment below!