Budgeting is a Fundamental Component of Financial Security
Developing an effective personal budget is a first step toward improved financial security. If you are like many others, you may have prepared a budget in the past, but you may not have used the effective tool to your full benefit. By understanding more about how a budget can set you on a path toward financial security, you may be ready to revisit your budget again.
What is a Budget?
You may be aware that a budget is a written list of all of your sources of income as well as all of your expenses. However, many people who prepare a budget fail to list non-recurring expenditures or expenses that recurring quarterly or annually. For example, you may have to pay HOA dues every quarter or taxes every year. You may also need to buy clothes periodically, pay for doctor visit co-pays and more. While some of these expenditures may be irregular, they nonetheless will need to be paid for at some point. The most effective budget will account for all expenditures in some way.
Using Your Budget to Plan for the Future
When you list all of your expenditures and income on paper, you no longer have to visualize or estimate how much money you have available to save for vacation, to invest or to put away in your rainy day fund. In fact, you can calculate how much money you will have left each month after all expenses are accounted for, and you can use this extra money to more accurately determine how to allocate the funds. For example, you may determine that you can save $50 per month for the rainy day fund and $100 per month for your vacation.
Many people believe that cutting back on spending is the answer to their financial challenges and the step to take to improve financial security. In some cases, this may be true. However, until you create a realistic budget, you cannot know where you stand financially. This tool can then be used to determine if you do need to cut back on spending, if you have money available to take a vacation, how much you can afford to save for retirement and more. It is a critical element that your debt reduction and elimination plan may hinge on as well. Whether your road to financial security is based on eliminating debt, buying investments or something else, developing a budget is a great first step to take for financial planning.