The Importance of Budgeting

Summary:

  • Budgeting forces an in-depth understanding of where your money is being spent
  • Helps to reduce debt troubles
  • There are easy tools to help you

The first and most important step to effective financial planning is developing and implementing a budget. That, of course, sounds easy and even simplistic. But if it were so easy, do you think that so many millions of people would be as deeply in debt as they are? In its simplest form, budgeting simply means to live within one's financial means. This is in sharp contrast to the prevailing lifestyle of "living beyond your means". And how do you live beyond your means? The answer, of course, is by using credit.

If your debt is already out of control, it will be that much harder to implement a budget. However, it's doubly important that you do begin a budget if you are in debt. Without one, it's a virtual certainty that you'll never be able to live without debt. (For tips on debt reduction, please read the article Get Out, and Stay Out, of Debt!) A budget forces you to get your spending under control, to "live below your means". And if you have debt that must be paid off, living below your means is exactly what you're going to have to do. Only then will you free up money that can go toward reducing and eliminating your debt.

How to Create a Budget

So, how do you make a budget? There are numerous charts and software and all kinds of things that you can buy to help you. They're all fine, but all that you really need is a notebook, a pencil, and a small calculator. Once you have these tools, sit down and annotate everything that you spend money on in a month. Everything! You need to know exactly where your money is going, every penny of it. This may take more than one sitting, because you may have to track your expenditures for awhile, possibly a whole pay period. Keep all of your receipts. Ascertaining your monthly bills shouldn't be much of a problem. You know what your mortgage and car payments are, along with your utility bills. It's the money that seems to slip away from you with nothing to show for it that you really need to concern yourself with. This is the area that you need to track.

Once you're aware of what you're spending your money on, you'll be able to put it down on paper. Make columns on your paper and label them with the different categories of your spending, i.e. car payment, insurance payment, house, gas, groceries, and so forth. Make a column for everything. Minor expenditures can be combined into a "miscellaneous spending" column. You're probably already surprised at the amount of money that's spent on trivial, or at least unnecessary, items.

Allocate your available funds to cover your necessary bills first. As they're paid, keep track of them on your budget sheet. Do not allocate as many funds for the miscellaneous expenditures as you have been used to spending on them. For example, if you've been spending $100 per month on entertainment, only allocate $50 in your budget. Then once you've spent your allocated amount, don't spend any more for that column! It takes discipline, but its well worth it. The money that you've saved can go toward paying down the principal of your debts, or into a savings or investment account.

It will be difficult at first, but most behavioral changes are. You're changing your mindset and attitude toward your money, and that takes time. But the longer you do it, the easier it becomes. It won't be too long before your budget has become your habit. And with your spending under control, you'll be well on your way to meeting your long-term financial goals.

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