Credit Sesame on why creating a budget is a good idea.
63% of Americans live paycheck to paycheck. This can make financial management challenging.
Paying bills, funding retirement, creating an emergency fund and saving are important components of financial stability. Sometimes it can seem like you do not have sufficient funds to cover everything. Today’s expenses have to be covered, which may leave you short at the end of each month. If earning more is not an option, what can you do to ease the situation? Creating a budget is a good start.
What is a budget?
A budget is a written plan that helps you decide how to spend your money each month. It helps you understand how money flows in and out of your finances and includes:
- How much you earn.
- What your money is spent on.
- What you really need to spend money on.
- Where you might be able to cut spending.
A budget can be for any period of time, but it helps to use your pay cycle and regular expenses as the basis, whether this is weekly, every two weeks or monthly. Creating a budget and sticking to it can help ensure you don’t run out of funds before your next paycheck is deposited and may even mean you can save for a rainy day.
Who needs a budget?
Budgeting is a good idea for anyone who struggles to get by on their paycheck. Careful money management is a worthy goal for everyone and just low-income individuals. High-income earners may also benefit from budgeting as almost half earning $100,000 or more per year live paycheck to paycheck.
A budget can help you develop good money habits for life. If you come up short at the end of every month when paying your bills or you cannot meet your savings goals, a budget can help show you where your money is going and where you might be able to cut back.
For example, suppose you spent $500 last month on dining out and $400 on groceries, but couldn’t afford a $100 power bill and a $100 water bill that were due at the end of the month. If you didn’t keep track of your expenses, then you might not realize why you came up $200 short.
A budget, if followed, can show you where you can cut expenses so that you can pay all of your bills. Cut your dining out budget to $300, and the power and water bills can be paid. All of this, however, is contingent on prices not rising drastically or using much more electricity or water next month.
But you may have bigger problems than not having a budget. If your earnings aren’t as high as your expenses — even if you’re only paying for necessities — then there may be no room in your budget to cut expenses more. You may be among the 37.9 million Americans, or 11.6% of the population, that lives in poverty.
But whether you have a low or high income, starting a budget can help you manage your expenses and improve your money habits.
Creating a budget is also about saving
Only 44% of U.S. adults have enough money saved to cover a $1,000 emergency, according to one survey. A carefully management budget, even if you are on a low income, allows you to save for things that you may not think about on a daily basis. For example,
- Any emergency
- Buying or fixing a car
- Security deposit on an apartment
- Down payment on a home
- Unexpected medical expenses
- New clothes
- Christmas gifts
- Insurance premiums
- Home repairs
- Home additions
Although these are not regular expenses, they are life expenses and you can expect to fund some or many of them at some point. They’re big enough that you may need to save for months or years to cover them. The point of an emergency fund is that it is for an emergency; you don’t know it’s going to happen and you don’t need the funds until suddenly you do. Of course, some are “nice to have” rather than essential, such as home additions and travel.
A budget can help you decide how much and where to spend your money for regular expenses and how much you can set aside for emergencies and other financial goals.
How to start creating a budget
Document your income and then write down your expenses. Subtract your expenses from your income. If the number you end up with is less than zero, you are spending more than you make. Look at your budget line by line to see where you can cut spending.
Income includes paychecks and any other money you get, such as child support. Expenses include everything you spend money on including:
- Rent or mortgage
- Car insurance
- School supplies
- Money for family
- Credit card bills
- Unplanned expenses such as car repairs or medical bills
You can create a budget any time, but then you need to check how you are doing against your budget. When you first start spending to your budget, you may find it useful to write down what you spend every day. You may find that the discipline of writing it down deters you from spending $4 on a latte every morning. Try taking a coffee from home each day instead.
What a budget may teach you
Plan to have funds left over each month and put the funds towards an emergency fund, savings or retirement fund. If you are confident in your budgeting and reliably have funds available at the end of each month, you may want to transfer that amount to your savings account each month automatically. Make it a rule that your saved funds are not to be used for everyday expenses.
With a documented budget, you may make fewer impulse purchases or spend less on your credit card. This is because your spending is top of mind and you are more aware of truly unnecessary purchases. Of course, you can still have fun, just budget for it. After a few months of budgeting, you may have saved enough to reward yourself with a treat of some kind. You will have earned it, quite literally.
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Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.