For most people, the reason for keeping a personal or family budget is the same — to meet your financial goals. Financial goals vary widely, though, so the specific reasons for keeping a budget lead people to create and use them differently. Whether your goal is to spend no more than you make, reduce your debt or save for retirement, a home or a vacation, keeping a budget is essential for financially savvy individuals.
Budget to make sure you are able to live on what you earn. Running up credit card debt you can’t pay can easily occur if you don’t track your spending. Sending out for pizza, going to a movie, buying a blouse or ordering a CD might not seem like an unwise use of money, but discretionary spending can add up to hundreds of dollars each month and thousands annually, compounded by interest. Knowing your exact financial situation every day will help you stop making impulse purchases and keep you out of debt and financial trouble.
Budgeting will help you reduce debt. When you create a budget, you should divide your expenses into fixed and variable categories, according to the Better Business Bureau. Fixed expenses include items such as a car payment, rent or student loan. Variable expenses change each month, such as groceries or utilities. Classifying your expenses this way will help you locate areas where you can reduce spending to help pay down debt.
Managing Cash Flow
Some budgets average your expense each month, while others record income and payments in the month they are due. This latter method will help you see if you will need extra cash some months, such as when semi-annual auto premium, quarterly self-employment taxes or annual property taxes come due.
If you want to save for retirement, a home down payment, tuition fund, vacation, emergency fund or other item, a budget allows you to see how much of your income you can afford to set aside each month. Recording savings payments as an expense in your budget is another way to see how much discretionary money you have left each month and discourage you from making impulse purchases that will keep you from meeting your financial goals.
A budget can be a dynamic document you update weekly or monthly, allowing you to see how you will end the year if your income and spending continue at your current levels. Add an “Average Monthly” column at the end of your budget document and divide your total spending to date by the number of months that have occurred. Multiply this number by 12 in a “Projected Annual” column to see if you are on track with your goals or need to tighten your belt.
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