Do you know exactly how much money you earn? Of course you do!
Do you know exactly how much you spend, every month? Maybe not, as well. Spending is a more difficult number to pinpoint.
If you don’t know exactly where your money goes each month, it is probably a good time to think about a budget.
Creating a budget doesn’t mean you can’t spend money! What it means, is knowing where every dollar goes and making intelligent financial decisions.
The income that you bring in each week or month is a well known number that most people have memorized. I would bet, that when asked how much you spend each month, you would have a more difficult time coming up with the exact number. This number varies which is the main reason it is hard to determine.
When you estimate your monthly expenses, you can easily be hundreds or even thousands of dollars off without realizing it. Expenses each month include recurring bills as well as cash, which many people don’t track as well as they do with other expenditures. Fluctuating expenses and unplanned costs also affect this number. Automatic expenses like healthcare or auto insurance costs are sometimes overlooked. Cash is one of the trickiest expenses to track. You may know how much cash you withdraw from the bank each week, but where does it actually go?
Why do you need a budget?
Having a budget helps you to plan ahead for life’s events. How many things in our daily lives are free? Not enough- most things cost some money. Having the money to pay for your basic needs is obviously important. Having enough money to also pay for things you want, gives you a good feeling of accomplishment.
When you plan ahead, buying a car, purchasing a home or starting a family is easier, at least financially speaking. Going on vacation, planning a major purchase or paying for college becomes more likely because you planned the money for it. Looking further down the road, helps you plan for retirement, downsizing and relocating after retirement.
Money Mistakes We Make When Young
If only I knew then what I know now…. How true for everything in life, and so true for all money matters.
My budgeting in my 20’s was quite simple: I made money, spent money and paid bills. I had a real job with a real paycheck and therefore, I had money to spend. At first, my simple plan worked well. It worked until I kept spending money.
I had very little money going into any type of saving account. I had no idea what interest rates were on my credit accounts or savings. If I wanted something, I bought it. If I didn’t have cash to pay for something, I charged it without a care.
By being financially ignorant, I was setting the stage for money troubles ahead. I ran up credit card bills that were too much to handle. The credit cards were in addition to rent, a car loan, student loan payments and my weekly expenses. As a result, I had to get second and third jobs to help pay off the balances. That was a humbling financial lesson.
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Planning Ahead for Life’s Financial Events
I started to pay more attention to my finances when I wanted to buy my own house rather than living in an apartment. This major investment forced me to look much more closely at my finances.
When filling out the loan applications the bank wanted to know all about my money. In fact, the bank wanted to know more than I really knew myself. That meant, I was forced to look at how much debt I owed, including student loans. The bank wanted to know how much I had in savings and what type of budget I had each month. The loan officer wanted to know every bill I paid including each credit card account.
Having to look at my finances and spending habits under a microscope was quite unpleasant. It was not an enjoyable experience but it was one of the best financial moves I have made. Analyzing my spending and tracking all my debt and finances was one of the smartest decisions I ever made. The benefit being, I was able to purchase my first house before my 30th birthday while I was still single.
How I Organize my Finances
I happen to be good with math and computers so tracking my finances on my computer was automatic for me. Mastering an excel spreadsheet took some time, but I would never consider not having one again. Now, I track all of my finances on various spreadsheets. I am able to track my spending, investments, college savings for my children and my own retirement goals all with the use of my spreadsheets. In addition, I do all of my banking and bill payments online, to learn more Read Here.
One huge advantage of working on a spreadsheet is saving paper and not needing to rewrite a new page when there is a change. In essence I have been using the same spreadsheet for my finances for at least eight years. I add and delete rows and columns as needed. I don’t need to start all over again each year, I usually just copy, paste and change the dates.
Below is an example of what one of my Budgeting Spreadsheets looks like. I consider this one my most important because it helped me get out of debt. I used the debt avalanche method to prioritize my bills, avoid high finance charges and combine debts so that I had fewer payments to make. As a result, I was able to pay off over $$ and am very close to being debt free. To read more about the Debt Avalanche system, Read this Post.
Why a Budget Works
Knowing your budget helps avoid getting to the end of a week or month and wondering where all your money went. Frequent overspending, running out of money and putting expenses on a charge card, can get you on a bad financial path. I am a firm believer in teaching our children to pay attention to every penny they spend. See more here about money lessons for Kids and Teens.
Having a budget helps avoid many unexpected financial issues. Budgeting can reduce stress related to your finances. Money related stress continues to be the number one stress factor in the U.S according to a recent survey.
When you know exactly how much money you have to spend and what your expenses are, you worry less. This enables you to focus on what your biggest financial problems are and how to help fix them. Many people can save money simply by analyzing their spending. When you know where your money is going, you become more motivated to cut expenses that are unnecessary.
Why Does a Budget Make You Happier?
Good budgeting gives you control of your finances. Budgeting forces you to pay attention to where your money goes and makes you question some expenditures.
Why are we paying for Cable TV that no one watches?
Do we really still need a land line when everyone in the house has a cell phone?
Can we find cheaper home owners insurance?
Is our oil company overcharging us for oil and a service contract each year?
How to be Happier with a Budget:
Budgeting reduces stress because you avoid getting deeper into debt since you know your money situation at all times.
Budgeting can be motivating. If I put away this much money each month, I will have enough money for that vacation I want to take. I wont need to go into debt to take that trip!
Good Budgeting helps you prioritize payments to focus on the costliest debts first.
Budgeting can boost your financial confidence and therefore increase your investments.
Having a Budget helps you plan for major expenses like a wedding, home purchase or starting a family.
Budgeting helps you track your money so you can see what goes in and out and when it is moving.
Get started with a Budget today! Start looking at your expenses and create a spreadsheet. The financial choices you make today will pay off in the future.