What Is Budgeting?

What Is Budgeting?
Photo by 401(K) 2012 – CC BY-SA 2.0

A budget is also known as a spending plan. With a budget, one is able to see in advance if s/he will have the money needed to do things/purchase goods in the future as a result of his/her current spending habits. If the future seems bleak, a budget can help one prioritize spending and ensure that there will be enough money in the bank to meet future goals. Budgeting applies to individuals of all income backgrounds, and can extend from a lone person to a corporation. As a budget focuses on cash inflows and outflows, it can help stabilize savings and expenditures. Moreover, it also helps plan for short, intermediate, and long-term goals, and can help prevent monetary crises if they appear. Following a budget can also help individuals get out of debt.

Simply explained, a budget consists of a detailed summary of ones net income and expenses over a given period of time. Typically done on a spreadsheet, the individual is able to identify unnecessary expenditures, cut back on them, and direct the saved money into their future goals.

There are many aspects to consider when establishing a budget. Net income (after taxes) does not only include ones wages in addition to wages, other forms of income such as pensions, commissions, and child/spousal support is also considered to be money is coming into the household. Similarly, when it comes to expenditures, budgeting does not only focus on visible payments (e.g. Bills, groceries, entertainment) it also includes setting aside money for expenses that might be needed in the month emergency money, deposited cash in a childs bank account, and so forth.

Budgeting stresses needs over wants. In terms of expenditures, individuals are encouraged to separate their spending into these two categories. Needed expenditures (e.g. Bills, rent, mortgages) have priority, and after setting aside money for these purposes, the remaining money can be divided into savings and into personal expenditure. The amount set aside/remaining after all expenditures is meant to contribute to ones savings and in building up financial wealth. This amount of money can and should be deposited into an interest-bearing savings account, as the amount deposited will collect interest over time and provide addition financial security. This savings balance can be used for various things, be it a college fund, insurance fund, or a retirement plan. It can also double as an emergency fund, to be used whenever a sudden need for money (e.g. Health care) appears. Using the money for investment in bonds, stocks, and real estate can also generate more wealth and financial security in the future.

Having established a budget is only the beginning after establishing a budget, monitoring the progress and effectiveness of the budget is crucial to the success of the budget, and changes should be made to any section (e.g. Further reductions in a certain expenditure category) whenever necessary. If one experiences an increase or a decrease in net income, an increase or decrease in the amount of debt, unexpected events such as a natural disaster, accidents, or health issues, or an expansion of the family unit through marriages and/or births, a change to the budget is necessary. Budgets will change as ones financial situation and circumstances change.

If successful, a budget will help one achieve various goals and help plan for major life changes. A budget allows one to look ahead and see if making a big purchase will be possible, or if changing a certain aspect of life will lead to a positive or negative impact on ones finances. It also helps one keep track of financial decisions and generate a solid financial foundation.

When engaged in adhering to a budget, individuals do tend to make mistakes. Common mistakes include:
1) Forgetting to write down certain expenses, as certain payments are easily forgettable (parking fees, a cup of coffee). A good way to stay up to date with expenses is to update your log at the end of each day, or to carry about a small notebook that you can write in every time you spend money.
2) Impulsive spending: small purchases may not seem like a big hit to ones budget, but it adds up over time. Make sure to include all expenses, even the purchase of a pack of gum.
3) Unwilling to indulge. Budgeting does not mean never being able to indulge. Allow yourself occasional splurges, as long as youre keeping to within your spending limits. If one is constantly deprived, it is like s/he will engage in a spending frenzy at a certain point and spend all the money s/he has saved since starting on a budget plan.

Summary

Budgeting is one of the key components to lasting financial success. It allows for short to long-term projections based on ones financial situation, helps prevent unexpected monetary crises, plan for important purchases, and more. If starting from scratch seems daunting, there are various budgeting tools available to use, such as Mint, BudgetSimple, and GnuCash.

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