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I’m sure that you have heard someone say, “It’s not in the budget.” You know that it is a way of saying that money can’t be spent on something, but do you really understand what a budget is?
Do you know how to use one? Did you know it can lead to your financial stability? If you answered no to any of these questions, read on.
What is a Budget?
A budget is a financial plan that helps you to cover all of your financial obligations and financially prepares you for the future. It is a way of tracking your income and expenses and planning where each dollar goes and how it should be spent.
Before I continue, you can download a printable budget form like this one at Printable Crush, or keep track of your income and expenses using a spreadsheet that automatically calculates your totals. Cashville Skyline offers this free spreadsheet you can download.
Why You Need One
Following a budget will lead to financial wellness and stability in your life. If you find yourself paying overdraft fees, eating a Ramen noodle diet out of necessity, or coasting into the gas station on fumes because you didn’t have the money to fill up the tank before pay day, you need a budget!
Understand Where Your Money Goes
Most people know how much money they make on their paycheck, but many people don’t understand where all of that money goes. Even if you think you know where your money is going, your budget may offer some unexpected insights and surprises.
One of the biggest surprises happened the first time I created a budget as a newlywed. I discovered that my husband was spending $60 per month on snack foods during his breaks at work! People are often surprised by spending they discover while creating a budget.
Cut Unnecessary Spending
Once you know where your money goes, you can assess you expenses and make cutbacks on non-essential spending. In our case, my husband started bringing his snacks from home instead of purchasing convenience foods, which saved us $40 a month.
Really think about every one of your expenses. What can you live without and where can you cut back? If you having anxiety at the thought of shutting off your cable, downgrade your package and see how you feel. Try going a weekend without using the cable. Watch movies, TV series on DVD, or stream Netflix, Hulu Plus, or Amazon Prime.
If you can live without the cable, go ahead and cut it off. You can watch your local news channels online, download free weather apps, and read the news online to stay informed.
Set Budgets for Expenses
Once you have cut back, now you can set limits for each area in your budget. This will allow you to plan ahead and have money for unexpected expenses and retirement. If you don’t know how to budget your income by expenses, Kiplinger has this useful little infographic to help you out.
As you can see, the infographic gives you a percentage value of your income and tells you where that percentage should go. It lists your top expenses as housing (which includes utilities, real estate taxes, and insurance), food, and transportation. Use this a s a guide for your spending and adjust, if necessary.
Stay on Track and Save
A budget gives you a better understanding of where your money goes and how it should be spent. It also gives you an opportunity to invest in your future through savings. Both an emergency fund and retirement savings are important to your future.
The emergency savings portion of the budget is the most important part. It is the portion of the budget that allows you to stay on track if unexpected expenses arise. Your emergency savings helps you pay for those expenses without throwing off your budget.
A Tool to Financial Freedom
A budget is a tool that leads to financial freedom. Having complete control and understanding of your finances and a backup plan for when things get tight will lead to a less stressful, more positive life. Use your budget as a way to free yourself from the burden of financial stress.