If you can pay your bills every month, you may not feel like you need to create a budget. Many adults associate budgeting with deprivation and restrictions. However, budgeting is simply a way to understand where your money goes. When you create a budget, you set yourself up for financial success.
Track Your Money
To create a budget, begin by tracking your money. First, total all of your monthly income. Take a look at your savings accounts, benefit statements, and investment accounts. Looking at all of this together will give you a full picture of your assets. Next, make a list of all fixed payments that occur monthly and look at the past three months of credit card and debit card statements to get an idea of where you spend money. If you have expenses that occur yearly, bi-annually, or quarterly, make sure you account for those as well. The idea of tracking your money before creating a budget is to make sure that you know where you are beginning. Creating a budget without understanding where you’ve spent your money in the past may set you up to fail.
Create a Budget
There are several strategies to creating a budget. One of the most popular is the 50/30/20 method. In this plan you allocate 50% of your income toward needs (rent, food, utilities, debt payments and other essentials), 30% for wants (entertainment, trips, and other non-essentials), and 20% for savings (emergency fund, retirement, savings goals, or additional debt repayment). Knowing your accurate income will allow you to allocate your income into the categories you spend your money on, and you may quickly see where you could be saving.
Why is a Budget Crucial to Financial Success?
Even if you are able to pay all your bills each month and contribute to your savings, it is still important to create a budget. Budgeting is simply the process of creating a plan for where your money will go. It ensures there will always be enough for things you need. There are several reasons why a budget is crucial to financial success.
- A Budget Can Help You Manage and Avoid Debt
Budgeting will help ensure that your expenses don’t exceed your income. You will know exactly how much you have and will not be surprised by a credit card bill you can’t pay at the end of the month. Most adults do not intend to get into debt, but start by just a few months of overspending, and a budget can help you avoid that. If you are budgeting correctly, you won’t be dipping into your savings to pay off a credit card bill that is higher than expected. If you have some debt, a budget will provide you with a concrete plan to pay it off.
- You Can Achieve Your Financial Goals
Having a budget will let you set and work toward your unique financial goals. If you have a short-term goal of a vacation, knowing your budget can help you set aside money each month toward that without cutting yourself short elsewhere. You will know where you can make sacrifices and how long it will take to reach your goal. Understanding your budget can also help you with long-term goals, such as planning for retirement. If you don’t know your monthly expenses, you can’t adequately prepare. With a budget, you will be in control.
- You Will Better Understand Your Finances
If you only know that your income exceeds your expenses and assume that makes you financially secure, chances are good you could be smarter with your money. Without understanding where your money is going, you are not managing your finances efficiently or responsibly.
Your Budget is an Important Piece of Your Financial Success
Creating a budget doesn’t mean living a life of deprivation. You can create a budget that lets you know where your money goes while still enjoying the life you’ve worked hard for. The difference is that you will understand your financial picture more deeply and will be better prepared for any circumstances you may face. How is your overall financial health? We can help. Contact Safe Money Partners for a financial strategy to help you set short and long term financial goals. Financial success is within your reach, and we can show you how.