It is important, no matter how much you make, to manage your finances wisely. An important tool in personal financial management is the budget. Although the concept can be intimidating, a budget is nothing more than a monetary breakdown of income vs. expenditures. There are many logical reasons for creating and following a budget, such as planning for unexpected expenses or the loss of a job, saving for your retirement or your children's education, and staying or getting out of debt.
Yet even in rough economic times such as these, many individuals and families do not follow a budget to guide their financial decisions. Budgets can be daunting and the subject of personal financial management is often viewed as a topic of social taboo. It can be difficult to learn how to manage your money effectively when you have no examples to learn from. While budgeting is taught in most high school finance classes, it usually comes before most students have to deal with the responsibilities and pressures of life in the 'real world'.
Here are a few indicators that a budget could benefit you in your current financial situation:
1. You have trouble making bill payments. This is the most obvious reason to create a budget. By allotting your financial resources to all of your regular bills (such as electric, gas, and water and sewage - to name a few) you can rest assured that there will be money to pay for them as soon as the bill arrives in the mail. Sure, creating a budget can reduce the amount left over to spend, but it all comes down to whether you want to be able to buy things on a whim or if staying warm on a winter night or cool on a blistering summer day is important.
2. You are paying minimum payments on credit cards. This is a bad one. I am proud to say that my credit card company must hate me. Why? Because I don't ever pay them any interest! In fact, my credit card pays me! But you know, it didn't start out that way. It took a few hard years of using a cash-only system after my wife and I were first married to learn how to manage our finances as a team. We had one credit card with a 500 dollar limit for emergencies and that was it.
If you're paying minimum payments, you're basically just throwing money away. Compound that with multiple credit cards and you've got a serious financial issue on your hands. It's time to nip this problem in the bud! Creating a budget can help you dedicate a little extra to help pay off those balances. You might consider a debt consolidation loan, depending on the interest rates on your cards, but to really get out of debt it will help to put a little extra on the loan payment each month as well.
3. You consistently don't know where your money went. If you often find yourself wondering where all your money went at the end of each pay period, you may benefit from creating a budget. Setting aside a certain amount each payday for personal spending will help keep your finances in check. I would also recommend using a cash system for non-essential or entertainment purchases until keeping track of your spending becomes second nature.
A problem that most people in this situation encounter isn't necessarily the large purchases. You will be surprised at just how fast your money goes on all of the little things you normally buy without a second thought. It may take you a few painful pay periods with nothing to spend a couple days before you get paid again, but hang in there, sometimes it takes a few of these hard lessons to teach us how to stretch our spending money further. This can also shed a little light on some of the unnecessary purchases you can cut out in order to make your money last longer.
4. You don't have a 3-month emergency fund. A 3-month emergency fund is a dedicated savings designed to cover your financial needs for a three month period. It is important to note that this doesn't necessarily require you to save three months worth of paychecks, as the fund will cover only your basic living expenses. It is near impossible, without a budget, to know what amount would be adequate in the event that you ever have to break the bank.
By creating a budget you can decide which luxuries should be cut in times of financial crisis. An example of such a crisis might be the loss of a major source of income for the household. In that situation certain amenities such as eating out and cable or satellite television could be cut from the budget in order to reduce the amount of savings necessary or to create a little breathing room to cover any other emergencies that may pop up.
As you can see, there are many positive reasons for creating a budget. There is nothing to fear about keeping track of your spending and saving for the future. By dedicating a specific amount of personal spending money, you can still be spontaneous - just as long as you stay within your limits. In the end, making a budget just makes, well, cents!