A budget can help you live on your income without going into debt, help you prevent damaging your credit score, allow you to save for fun or important needs and let you project how much money you’ll have at the end of each year. A dynamic budget, or one that changes projections each month as you input your income and expense, will help you keep track of your finances and avoid falling short of important life goals such as saving for retirement, buying a home or starting a college fund for your children.
Creates a Financial Picture
A budget helps you create a complete financial picture of your household income. When you create a budget, you put all of your income and expenses in one place to examine, allowing you the ability to create financial plans. A good budget will include all sources of income, including salary or wages, interest, stock growth, gifts from family members, sales of assets, such as during a garage sale, and tips, bonuses and commissions. After you enter your expected expenses, you’ll know if you will be able to save adequately for retirement, a house down payment, emergency fund, college tuition for children or discretionary items such as a trip, kitchen makeover or other purchase.
Controls your Spending
Without a detailed budget, you can have a very difficult time living on your earnings and meeting your savings goals. Putting things on credit cards allows you see cash in your bank account you really don’t have, if you consider your debts. Keep a budget that tracks all of your spending, including small amounts such as lunches, theater tickets, CDs or other items you don’t feel you need to record. These purchases add up to hundreds of dollars each month and thousands each year. A budget tells you how much money you can expect to have left over each month, or whether you will be spending more than you make during some months. Knowing this reigns in your impulse to buy things you don’t need and can’t afford.
Helps you Save
Looking at savings as expenses gives you a reminder each month that the money in your bank account isn’t really available for spending. For example, if you budget $150 per month as an expense toward a year-end vacation costing $1,800, then when you see $2,000 in your bank account, you’ll realize you only have $200 available to spend without curtailing your vacation plans. Subtracting retirement, emergency fund, college fund and other savings set-asides from your take-home pay will help you budget more reasonably for discretionary items so you can meet your goals. Without a budget, you will be guessing at how much money you can spend and still meet your savings goals.
Projects your Situation
Trying to live on a budget you create at the beginning of the year and don’t update will not provide a realistic picture of whether or not you are meeting your goals during the year. Updating your budget each day, week or month as you spend money lets you see if your budgeted expenses were realistic and whether or not you will meet your annual goals for debt reduction and savings. Each month, divide your total spending by the number of months that have passed to determine if you average monthly spending is keeping pace with your budgeted amount. Multiply this number, and your average monthly income, by 12 to project what your financial situation will be at the end of the year, based on your current income and spending levels.
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