Budgeting 101By Caitlin in Posts
Budgeting is a really important tool in personal finance. Total financial independence has to do with wise expenditures. Budgeting helps you to make up and implement spending rules for what you can and can’t afford. It is an easy way to deal with the stress of paying off debts and reducing costs. With a set of personal budget rules, hopefully money management will not be something that causes anxiety but reassurance that there are always ways to save money and pay off expenses.
So what exactly is a budget? Think of it as a financial plan of your income and where it goes. Obviously if you have tons of money you don’t necessarily need to plan out a budget. But for people making a decent amount of money with a house and a family it’s a really efficient way to figure out what kind of disposable income you have for fun things like family trips. People tend to think that when they buckle down and create budget they’ll have to cut down on these fun things. That is not always true. It is simply a way to keep track of where your money is going and to check if you actually need to cut some of your expenses.
The first step is figuring out your income. In a family it requires the breadwinning spouses to sit down and figure out the household income. This is not exclusively salaries but all sources of income like interest on investments for example.
Once you’ve tracked all sources of income you’ll have to look at all your monthly expenses. It’s easier to start with fixed expenses like mortgage payments, car payments, credit card and all loan payments as well insurance. These will be easy to determine because they are the payments you generally make in a fixed amount every month. They will not change easily. The hard part is tracking the variable expenses; basically where the rest of the money is going. This will include things like groceries, utilities, household expenses, school expenses for children and others.
If you find you need to reduce your expenses you should perhaps find ways to reduce your fixed costs. There are things that can drastically change your monthly payments. Perhaps changing telephone or cable companies that offer better rates or getting rid of magazine subscriptions and so on. If you get creative, you’ll find ways to reduce your monthly fixed costs.
It’s important to stay motivated when you’re trying to build a solid budget. It is one thing to sit down and write one out and a whole other thing to actually adhere to the rules you impose on yourself. It’s hard keeping to a rule book but spending while on a budget doesn’t mean you have to go without some of the things that you love. It just means you’ll have to be a bit more selective. Also, don’t forget to be realistic in your expectations! It is a challenge changing your spending habit but don’t try to reach too far too soon. It is easy to get depressed when not reaching your goal. Unrealistic goals will cause you to lose motivation. Don’t make your goals too easy but challenge yourself in realistic ways. Give yourself smaller goals with smaller timeframes. These can still be challenging and yet realistic to accomplish. Don’t forget to reward yourself and your family every time your budget saves you some money! Accomplishing a personal finance goal is a great reason to celebrate!