In simplest terms, a personal monthly budget is a way to account for your money that compares your bills and expenses with your income. Some people create detailed spreadsheets to track every dollar that comes in and goes out while others keep a very high level budget that doesn’t go into as much detail. Whatever method you choose, having an understanding of where your money goes and how much you have to spend on discretionary expenses is vital when it comes to managing your money. If spreadsheets and detailed tracking isn’t up your alley, you can always sign up for Mint which is 100% free and is an incredibly easy way to automate your budget and finances.
A budget will let you see exactly how much money you have available each month and prevent you from guessing. How long would a business last if they had no accounting and just guessed when it came to spending money on the business? It’s no different for your personal finances. Money comes in and money goes out, and at the end of the month if you haven’t planned accordingly it could mean not having enough or resorting to taking on high-interest debt to make up the difference.
Here are ten ways keeping a budget can improve your finances:
Pay Your Bills On Time
If you try to pay your bills without a budget, then you are destined to get behind on making your payments and that can in turn hurt your credit score. Late payments also lead to late fees and penalties that add unnecessary debt to your already mounting obligations. A budget helps you to pay on time and preserve that credit score.
Pay Off Debt
A budget can allow you prioritize your debt and figure out which bills you want to apply your extra money towards each month. Your budget becomes your plan of attack for lowering and eventually eliminating your debt. Without a budget you could get stuck in the minimum payment trap where you stretch out your debt repayment and cost thousands in unnecessary interest.
Pay All Of Your Bills
A monthly budget outlines all of your bills and expenses and makes sure that you pay your bills every month. Even if a bill gets lost in that pile of mail on the kitchen table, you can still pay it on time because your budget and bill calendar will remind you.
When you have a budget, you have to account for every dollar you spend. That includes the money you use for entertainment each week and the money you spend on coffee and lunch for work. When you see all of those expenses laid out on paper or in budgeting software it makes it easier for you to see where you’re spending the most money and find ways to make cuts. If you see that you’re spending $500 a month just going out to eat yet can’t even pay your minimum credit card bills each month, you’ll have an instant plan of action to cut back so there’s more money to apply toward your debt.
Makes Room For Savings
Most people who do not have a budget avoid putting money in a savings account because they are never sure if they will need that money to pay bills. When you have a budget, you know exactly where your money is going. That means that you can set aside a certain amount each month in a savings account to pay for those sudden emergencies, pay for holiday gifts, or allow you to take that vacation you have always wanted to take. Budgeting allows you to pay yourself first without sacrificing other obligations. Find out how much of your paycheck you should be saving.
Helps You Sleep Easier
The honest truth is that it is easier to keep your head above financial water when you can see exactly what your money is doing. The stress caused by never really knowing how you stand financially is replaced by the security of having everything under control.
Helps to Coordinate New Spending
A budget allows you to see what you can afford and what you cannot afford. For example, if you need to buy a new vehicle, then your personal budget will let you know exactly what you can afford to pay each month. It takes the guesswork out of your financial decisions, and when you’re talking about big-ticket purchases where salesmen try to get you to spend more than you can afford, it could save your financial life.
Helps You Achieve Goals
Before you had a personal budget, your goal was to try and have enough money to survive from week to week. With a budget in place, you can start to realistically plan for long-term financial goals such as retirement or saving for a new house. Even if you’re still living close to paycheck-to-paycheck after creating a budget, you’ll have the understanding of what money you do have to work with so you can start saving for those long-term goals, even if it’s just a little bit at first.
Creates a Unified Plan
One of the problems that many households have is that both wage earners in the house have different ideas on how the household income is to be utilized. This kind of confusion results in bills not getting paid and money running short before payday, not to mention stress in the relationship. With a budget, everyone in the house knows what bills need to be paid and how much money is available for buying food and putting gas in the car, plus it provides an opportunity to sit down and talk about what plans you both have for future spending.
Helps You Give Your Kids Good Financial Habits
One of the more frustrating things that parents experience is struggling to raise children, and then watching as those children grow and then develop financial problems of their own. If you are not careful, then you may have to find a way to support your household and the households of your children.When you teach your children the benefits of a monthly budget, then your children become proficient in managing their finances. That reduces the financial strain on you and helps your children to reach their financial goals.
It only takes a few minutes a day to develop and maintain a budget. But that few minutes could mean the difference between your financial success and pending financial disaster.
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Filed Under: Personal Finance
About the Author: Jeremy Vohwinkle is a Chartered Retirement Planning Counselor® and spent a few years working as a financial planner. Today, he helps people make the most of their money by writing about personal finance here and elsewhere on the web. Jeremy is also Coach at Adaptu and a regular contributor for other publications such as Intuit, and American Express. Be sure to follow Jeremy on Twitter or Google+.