There are many advantages associated with a monthly budget. Listing your income and expenses provides a basis for a budget and for establishing goals such as buying your first home, saving for your children’s education or preparing for a comfortable retirement. However, the advantages are only advantages if, after you prepare the budget, you stick to it.
Snapshot
Listing income and expenses is the first step in creating a snapshot of your monthly commitments. By establishing all sources of income, including salary, bonuses and personal items you may have sold during the month, as well as expenses, which includes everything from the house payment to the dollar you fed the parking meter, you have the advantage in determining where your money goes today and how to make it go further tomorrow.
Net Worth
Another advantage of preparing a monthly budget is establishing your net worth. By making a list of all your assets such as your home and automobile, and subtracting from that the total of all your liabilities, which include such things as credit card and loan balances, you arrive at a figure that is your net worth. Knowing that figure is just the beginning of establishing and following a budget to grow your net worth. For example, paying down your outstanding debt through adherence to the monthly budget formula can significantly increase your net worth.
Emergency Fund
Budgeting is an efficient way to establish a source of easily accessed funds in case of a financial emergency. The primary advantage of creating an emergency fund is ensuring you can weather a sudden dip in your monthly income. Your emergency fund should include cash and readily accessible assets you can easily convert to cash. Financial professionals recommend you set aside three to six months of emergency-fund cash to cover expenses.
Goal-Setting
Most people need motivation to reach their goals. If you fall in that category, setting goals and designing a monthly budget model to meet them is a primary reason for putting your household on a budget. The advantages of pursuing goals through a budget are many, among them is the ability to prioritize spending, the capacity to determine the nature of your expenses and the means to organize your cash flow to fund your predetermined goals.
