The importance of a budget
Preparing—and sticking to—a budget is essential for responsible money management. Whether you just have a few bills, or you're responsible for paying all of your household expenses, understanding how much money you have and knowing where your money is spent is the first step toward achieving financial stability.
You wouldn't build a house without a blueprint. Think of your budget as a blueprint for your financial well-being. Your budget is the foundation for good financial habits that will help you avoid the problems and pitfalls that will probably arise without a structured plan.
Components of a budget
Start with keeping track of where your money is spent now. Take your last few bank statements, credit card statements, pay stubs and any receipts you may have for 1 month.
The idea is to take a snapshot of your monthly expenses, savings and take-home pay. Then you can begin to fill in the holes by estimating how much money you spend on discretionary items such as food, clothing and entertainment.
Be sure to consider the following expenses:
- Mortgage or rent payment
- Car loan
- Credit cards
- Utilities: phone, electric, water, gas, cable, Internet
- Insurance: car, health, life, home
- Savings and investments
- Food and clothing
- Gas and travel
Income - expenses = reality
If you're very fortunate, after you've added up your expenses and subtracted the sum from your monthly take-home pay—you'll have some money left over. Good news! This is money that you can begin to save or invest.
If you're like many people, however, you'll begin to understand why you can never quite make ends meet. Don't despair! Before you can solve a problem, you first need to recognize it, and that's precisely what you've done in making your budget. Now you need to begin strategizing about how you can get your financial situation on the right track.
- Discretionary expenses
Take a hard look at your expenses. Food is a necessity, but do you really need that latte every morning? You could make coffee at home, saving you about $5 a day. Could you eat at home one more time a week? Or consider that premium cable package you're paying for—do you really need all of those channels? When you start to look at your expenses in terms of needs versus wants, you may be surprised that you can do with much less.
- Increase your income
If you've cut all the expenses from your monthly budget and you're still operating at a deficit, it's time to begin thinking of ways to increase your income. The most obvious way to increase your income is to get a second job. Tutor students, or babysit for a neighbor. If a second job isn't a possibility, could you hold a garage sale, or sell some of your unwanted goods online? Turn your hobby into a business? Or, could you make adjustments to your withholding taxes so that your net pay is increased?
- Manage your debt
If you have more than one credit card payment a month, consider consolidating them into one monthly payment. (Be sure you close the old accounts though!) Struggling under student loan debt? Contact your lender to see if you qualify for loan consolidation or another repayment option.
And get smarter about your repayment strategy. Instead of making equal payments on your credit cards or loan debt, pay as much as you can afford on the one with the highest interest rate. When the balance is paid in full, close the account and move to the next highest interest rate debt. If you get paid biweekly, take the "extra" paychecks you receive on months that have five Fridays and apply them towards your debt payments.
Evaluating your spending habits by developing a budget makes you think about your relationship with money. Like any relationship, to grow healthy and strong you must tend to it diligently. The basis of your money relationship starts with a budget, and with proper care, develops into financial well-being.
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