It is probably impossible to talk about finances without considering the role that budgets play in your financial success. Knowing what a budget is, its importance, and how to create a workable one are all small but crucial steps in keeping you financially successful.
Is financial success important to you? Then let’s discuss what you should know about budgets, so we can keep you on a good financial track.
What is a budget?
A budget is a plan of how money is to be allocated during a specific period of time, usually over a month. According to Investopedia, it is an estimate of “revenue and expenses over a specified future period of time and is usually compiled and re-evaluated on a periodic basis.” As long as you make and spend money, you should make it a priority to learn how to budget.
Most times people tend to have a skewed idea about budgets and how they should look. Many spend a considerable amount of time creating a budget that is not feasible, and therefore, fail to live within their means.
A well-designed budget should make you conscious of what type of spender you are and your spending habits. It should also include all your sources of income and not just expenses.
Need to know what you should be spending your money on? A budget is one excellent way to help you. Aside from shedding light on what you should be spending on, a budget helps you know, quite quickly, if you can afford it.
Budgets help to put your spending habits into perspective. They also help you to see where you can make a few cutbacks, if necessary. Keeping a budget isn’t easy. There are many factors that can get in the way of making a budget work.
Some of these factors can include—but are not limited to—income changes, a new addition to the family and rises in the cost of living.
The reality of life is, change happens whether we expect it or not. And what you know about budgets can make the difference when applying it to your life.
Knowing when your budget is not the right fit
Finding the right budget style to suit you is important. Your net income, lifestyle and goals are all necessary components that must be considered when creating your budget. The more you know about budgets, the more you can tell if your budget is a right fit for you.
Here’s a simple test. If your total income is somewhat low but your spending quota is high and you are using all of your earnings each month, then your budget does not suit you. A budget change is definitely needed.
“When your outflow exceeds your income, your upkeep becomes your downfall” — Jim Rohn
Further, if you are spending all of your income every month, your budget is failing. As a consumer, you need to be realistic with what you can afford to spend each month. Focus on short term (top end) and long term (bottom end) expenses instead of between the two.
Once you realize that you are spending more than you are earning, you will know that your budget is not right for you. At this point, you should see that you will need to cut expenses and make changes to your budget for it to fit your needs.
Empowering the Possibilities takes steps with you to help you not just know about budgets, but to develop a budget that you can use to realize financial success.
The basics of budgeting
The first step to creating a well-designed budget is to understand the basics. The goal of a budget is to bring every spend in your life down to a set number. For some, this may seem confusing but the main focus of any personal budget is to spend less than your income. Another term for this is called, living below your means.
So, how do you know if you are spending your money correctly or living beyond your means? There are lots of methods to test this. One of the best is creating a money diary. This will help you keep track of your income and expenses throughout the weeks and months.
Even if you think you can’t keep track for a full month, try to keep up for a few days. Once you realize how you spend your money from day to day, you will want to continue using a money diary to stay on track with your spending.
Creating a workable budget
To be able to implement a budget that works, you need to determine why you need a budget. You should also consider what your goals are (both long and short term) and address how your financial obligations would impact your budget.
The process of implementing a budget can help you understand how you spend your money from day to day and determine what are unnecessary spends. The most important part of creating a workable budget is assessing what your net income is.
Your net income is the guiding point to assessing how your money is spent. To best assess your funds you should ask these three questions:
• What are your fixed expenses, such as mortgage payments, or car notes?
• What are your flexible expenses, such as credit card payments?
• And what is your disposable income?
Neglecting to account for any of these components can cause your budget to fail.
It’s important to note that when creating your budget you should always leave room for unexpected financial situations. A good budget can always be improved and adjusted to suit your changing needs.
Points to prevent budget failures
Do not take the responsibility of creating a budget lightly. The process requires patience, diligent calculations, and a proper understanding of the budgeting basics mentioned here.
Now that you know about budgets, there are some points to prioritize for creating your ideal plan. These key points are shared to help prevent budget failures:
- Ensure your budget is well suited to your needs. Doing so can increase your chances of creating a successful budget.
- Stay on track of your spending as frivolous overspending can lead to budget failures.
- Share your budget goals with a trusted person who can keep you accountable for your spending.
- Figure out your spending style or spending triggers and work on overcoming them.
- Make sure that your budget is practical.
- Include all aspects of your finances in your budget, such as all sources of income and all expenses.
- Adjust your budget to life changes, as needed.
- Let your budget have some flexibility to allow for small, fun spends. Budgets do not have to be rigid and restrictive.
- Create an emergency fund to allow for unexpected expenses.
- Ensure your expenses are always less than your income.
The information here is essential to help you build strong financial plans and goals. Our previous blog on the topic will help you know if you need one.
Creating a solid budget that suits your needs and personality can help you stay on track of your spending. It lessens the chances of you calling it quits on your budget and paves the way for your financial success.
Always remember, your budget must be practical and easy to follow. Understanding the basic principles shared here and allowing for some flexibility can make all the difference in the successfulness of your budget.
Want to learn more about budgets and how to protect your money? Talk with us at Empowering the Possibilities today.