One of the most beneficial financial habits that you can adopt is budgeting. The magic that it can have on your life isn’t often realized if you’ve never lived on one. To understand the importance of budgeting, we have some put together the top reasons that it’s a vital part of your financial health.
Start Budgeting to Reach Financial Goals
Many of us want to own a home that we can raise our families and provide for. There are also short term financial goals that we want to achieve like saving up for a summer vacation or at least being debt-free and having some emergency funds. When we put together a plan on how to achieve financial freedom, we have to try budgeting that can be followed to get the results we want. A budget is our financial blueprint on how much to spend on gas, groceries, rent, etc. so that there are enough leftover funds to put into our financial goals.
Without a budget, you can easily spend more money than you should be. We typically have a general idea of how much money we’re able to spend. Sometimes, we decide to “splurge” by going to an expensive restaurant or buying good seats for a concert. It’s easy to lose control of our spending habits when we aren’t using accurate numbers in the first place.
Think about those daily spending habits you have. A cup of coffee for $3 a day during the workweek doesn’t seem like a big deal. Multiply by that five days, and that becomes $15 and $60 a month. That might not even account for the days that we might “splurge” or a more expensive latte. Knowing how these small habits impact your finances can put you in a position to take more control.
Worry Less About Your Future
Money is a stressful topic for many people. A budget is not intended to limit someone from having fun in their life but creating more opportunities to have more fun. It happens when we have confidence and financial freedom from being debt-free, have savings and emergency funds and are meeting all of our other needs.
How to Set up a Budget
Now that you know the importance of budgeting, you should know how to set up a budget. Setting up your budget for the first time appears daunting at first, but there are three basic aspects. The budgeting purpose is to plan, control, and track how much money you are spending and savings.
Determine what works best for you whether it’s writing down your budget on paper and logging it in a notebook that you carry with you or a mobile app on your device. Here are the three parts that should be part of your monthly budget planner below:
Determine the Budgeting Purpose
The first step of creating a budget is to think about what is your budgeting purpose or decide on what goal you want to achieve. The goals could be long term or short term financial goals, though it’s easier to start with a short term goal. Some examples are starting an emergency funds account, paying off credit cards, or saving for an upcoming trip.
Make sure that you are as specific as possible. It means setting the amount that you want to save or pay off, and when you expect to accomplish the goal.
Set up Your Monthly Budget Planner
Now it’s time to identify your income. It means the amount of money that you are planning to receive each month. Each source of revenue should be a separate line item.
For example, let’s say that you have a full-time desk job, work part-time at a retail store, and occasionally drive for a ride-sharing company. That’s three different income sources.
Add the amount that you expect each income source to bring in. If it’s an irregular source of income like many gig positions are, try to put it on the lower end of what you’d expect.
Estimate Your Expenses
Finally, you can write all your common monthly expenses. There are two types of expenses: Fixed and variable. Fixed expenses are those that you will have to pay each month like rent or mortgage, gas, groceries, utilities, child care, etc. Variable expenses are more for discretionary spending like cable, streaming services, and restaurants.
Now that you’ve created your budget, the second most important thing for you to do is to start tracking it. Figure out best to incorporate tracking into your life. This could mean spending a few minutes during your bus commute home to input all the things you purchased that day or keeping a running total on your phone or budget notebook that you carry with you as you spend. What’s important is that it’s an easy way to create the habit of tracking your expenses.