The budget is the first step towards financial planning. It includes a series of questions about how you spend your hard-earned money. And being responsible for your inflows and outflows is a healthy exercise to strengthen your ability to save and plan for the future.
Having a budget helps us live within our means and avoid spending more than we earn.
While it may take work at first, in the long run, budgeting will ensure you have the financial stability needed to build wealth and, just as important, peace of mind.
3 good reasons to make a budget
The importance of the budget varies according to many factors. While not everyone needs to budget the same, there are essential situations to consider.
- Organize your finances. If your financial record keeping is a mess, you need a budget. You need to understand what the ins and outs are that got you into this mess and start keeping track of where your funds are going.
- Maintain financial goals. Create a realistic goal by living and signing up to an initial budget. You can derive a real financial plan by learning what is affordable and what is not.
- Retirement plan. Everyone needs to budget for retirement. Paychecks will inevitably stop and you’ll have to rely on Social Security, investments or a pension. The question is, how much do you need to retire? The answer is the required amount of your assets each year to live on. And the only way to get that answer is by budgeting.
Setting a budget is a good habit
Creating a budget is always a good idea. But being responsible for your finances and spending habits can be daunting for some, while for others it comes naturally.
Keeping in mind that not all budgets are created equal, here are some guidelines to get you started. The goal is to understand why and how to budget according to your profile.
Why you may need to create a budget
It is advisable to create a budget in various circumstances. Some of the main reasons to manage your finances are:
- Stay out of debt.
- Understand retirement finances.
- Save for a significant expense.
- Understand what you can afford.
- Keep track of where you spend money.
Those who do not budget
There are two distinct categories for those who need to create a budget and those who don’t. While both groups can benefit from financial responsibility, the first group, those with their heads in the sand, really need a budget. The second group, those who consider themselves wealthy, could probably get away without one.
Those who are uncomfortable being realistic with their finances often have similar concerns. They are often heavily in debt, embarrassed by a lack of savings, may have an overspending spouse, or, as the adage goes, they may think “ignorance is bliss.”
At the opposite extreme are super-rich people who don’t have to budget. This group earns enough to save and spend at their discretion, have huge assets, or have an inheritance. Therefore, they are not worried about their current finances.
Where to start when creating a budget
Creating an effective budget strategy depends primarily on the individual. Some create spreadsheets and update them daily with what they spend and where, then reconcile these spreadsheets monthly to stay current.
There are also budgeting software programs, like Quicken or Mint, or proprietary ones created by financial advisors to link credit cards and bank accounts. These services track and classify your spending, and while intuitive, they still require the human touch to ensure accuracy.
Some people budget by creating multiple bank accounts for designated monthly expenses, such as personal expenses, home, and savings. They pay into these accounts each pay period. Others used the very simple method of budgeting envelopes.
Then there is the automated budget. This person knows what he needs to save for retirement and college and keeps up to date monthly and annually. From there, they spend the rest.
The next step is financial planning
Now that you have a general understanding of the importance of creating a budget, your next step is to create a budget yourself! You may also consider seeking the help of an experienced financial planner. This person can help you invest the money you save, so you will have more money over time.
The goal is to live your best life within your means so that when it comes time to retire, you can continue to live the quality of life you had while working. The best motto for retirement is to do it with wealth, health and happiness.
President, Partner and Financial Advisor, Diversified, LLC
In March 2010, Andrew Rosen joined Diversified, bringing with him nine years of experience in the financial industry. As a financial planner, Andrew builds lifelong relationships with clients, providing guidance through all stages of life. He has earned his Series 6, 7 and 63, along with property/casualty and health/life insurance licenses.