Creating a spending plan for your future income is called making a budget. Making a budget lets you know if you have enough money to pay your expenses and do everything you are planning on doing.
If you don’t have enough money, then seeing where the money is going allows you to alter your spending habits to accommodate your income.
Why Is Budgeting Important?
Budgeting is important because it makes you an active part of your money.
You manage your money instead of always feeling like you are behind or don’t have enough. It gives the power back to you.
It may seem constricting to not be able to spend every time it crosses your mind, but in the end, creating and sticking to a budget will help you feel like you have more freedom. Keeping yourself out of debt is an important part of financial freedom, and a budget is what helps you pay off the debt you have and avoid going into unnecessary debt in the future.
Budgeting Opens Up Resources
You can start by creating a simple monthly budget that you assess and tweak each month to help you get a feel for how you are doing and what habits you would like to develop.
Once you get the hang of it, then you can start to plan further into the future. You can make a six-month budget or even a yearly budget that will help you see the bigger picture of your finances.
Once you can see further into the future with your finances, you can start to invest that money and spend it wisely. You can invest in stocks, starting up your own business, or in real estate. According to Adam Kapner, managing apartments can be a great way to invest your money into a profitable business.
Creating a Budget
There are many resources for creating a budget, including many user-friendly apps that will help you learn the basics. You can also use an Excel spreadsheet or just a plain notebook to track your spending. The important thing is that you find a method that works for you and fits into your lifestyle.
Once you have a method for budgeting, you can move on to actually creating the budget.
First, you need to set financial goals. You need to know what you want to accomplish with your budget. This will be different for everyone, and it will look vastly different for a college student then it will for someone nearing retirement. You want to create goals for your short term plans and look further into the future.
These goals should work together to bring you closer to where you want to be.
The next thing you need to do is to examine your current income and expense list. Since most bills occur monthly, this is a good timeframe to start working with. Over the course of a month, you will have at least one pay-day, but maybe more. You should calculate how much income you generate during the course of a month.
If you have multiple income streams, be sure to include all of them. You should use your net income levels instead of your gross income number to throw off your budget. You only want to work with the money that will actually be coming into your bank account.
You also need to account for all your spending over the course of a month.
Start with the fixed, committed expenses like mortgages and utilities. You can then move on to variable committed expenses like groceries and gas for your car. Last, you need to list all the discretionary expenses you have like recreation or entertainment. These are the least important expenses, so you should calculate them last. It may be surprising how much you spend if you haven’t been tracking it previously.
You may even want to go through your bank statements to ensure that you do not forget things.
Once you have these numbers calculated, you can see if your spending and income are well balanced or not. Your income should exceed your spending, and you should have enough leftover that you can save against future expenses that may happen.
If you do not have enough, then you know where you can start reducing your spending in your budget to ensure that your finances are well balanced.
Accidents and illnesses happen to everyone, so it is important to be prepared for them, so they do not put an undue amount of strain on your finances. You can do this by having an emergency fund in a savings account that can help ease the burden if an unexpected expense does happen.