In this series I am covering the 24 tell-tale signs that you could be in financial trouble. Over the next few weeks I will be presenting these signs, how to identify them and tips on how to address the issue.
You may be setting yourself up for trouble if you don’t have a budget, or if you do, don’t refer to it on a regular basis. Two of the most important actions you can take to stay out of financial trouble both involve budgeting.
First, you simply need to create a budget. And by budget I don’t mean using some generalized ballpark numbers, you need to really get into detail for the budget to be effective. This budget needs to take into account all sources of revenue and all expenses in the household.
The second action is to establish a lifestyle that fits within your income and your budget. Unfortunately this may mean cutting back on spending or changing your lifestyle a bit to make it work, but these changes are necessary. Along with living a lifestyle that works within your constraints you need to review your budget regularly. Life is rarely static and your budget will change. Your income may change, tax rates may change, interest rates change and emergencies arise. These events need to be factored in on a regular basis in your budget.
A Blueprint for Success
Think of your budget as the blueprint of your personal finances. If a builder needs a good blueprint to build a house who says you don’t need a blueprint to build wealth? Sure, you can build a house without any formal plans because homes use certain materials and basic design principles. But will this house be structurally sound? Will it meet code? Will there be some design conflicts along the way? You bet.
The same goes for your finances. You can go through life without a financial plan and make out fairly well, but will you encounter trouble along the way? Like building a house our finances have some basic building blocks and principles that are used: income, expenses, taxes, savings, investing, etc. Even though we are aware of what it takes to create wealth and live financially sound, without a detailed blueprint it makes that job a bit more difficult.
Getting Started With a Budget
Nobody likes the idea of sitting down and digging into the details of their finances to create a budget. This initial step is often the hardest to complete. Creating a budget doesn’t have to be a long and unpleasant experience. In the past I have discussed getting started with a budget and there is even a very easy to use downloadable worksheet you can use to get started today.
Finally, a budget is only as good as the data you use — garbage in, garbage out. Be honest with yourself and be as accurate with the numbers as you can. You won’t be doing yourself any favors by guessing or fudging numbers because they look better on paper.
Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.