Do you cringe at the thought of the b-word?
Budget!
Budgets can be challenging to stick to and restrictive!
But they are necessary!
People do not want a budget telling them what to do.
However, these people are also living paycheck to paycheck. They have a lot of stuff to show but not a lot of net worth.
They are also just stumbling into life with no actual plans. They live to work to pay the bills.
But you are not ordinary people. You want to learn about how to be better with your money and live an intentional life.
Budgeting leverages the money you already have.
Know the purpose of budgeting and how to use it to your advantage.
What is a budget?
A budget is a financial plan that helps you keep track of the money coming in and going out and tells your money where to go.
Budgeting will help you buy things and give you the experiences you want out of life.
To reach financial freedom and become financially independent, you must budget.
There is no way around it.
What is the purpose of a budget?
The purpose of a budget is to increase your financial wellness.
Budgeting will improve your overall financial health through:
- Strategic planning
- Building good money habits
- Tracking where every dollar goes.
Here are ten purposes of budgeting:
1. Helps you know what is important to you and your family
Most families do not discuss family values or goals. Families exist in life in hopes of stumbling into a life they love.
However, a budget can help you create a life you love.
Create a family budget according to your family values and goals.
Discuss with your partner and children what you value as a family.
With your partner, ask yourselves what an ideal family life means to you and how it looks.
Once you decide on family values and goals, look at your budget and see whether or not your budget reflects your values and goals.
If not, then begin making changes so that it does.
Money decisions become more manageable once you ask yourself whether or not spending the money aligns with your values and goals.
One of our top priorities is taking family vacations. We cut back on shopping and eating out so we can put extra money towards vacations.
2. Helps you stay in control of meeting your financial goals
A budget is a financial plan that keeps you on track and helps you meet your financial goals.
Identify what your financial goals are.
Make short-term, medium-term, and long-term goals.
Start with the end in mind and work backward to see how much you need to save/invest to meet those goals.
Our goal every year is to max out my Roth IRA, which is $6,000. So every month, we budget $500 and prioritize it as if it was our rent.
3. Identifies how much money you have to spend
Some people have a good idea of their salary but have no idea how much money is coming in.
Salary is different from the actual cash (or net income) coming in when you consider paying for taxes, retirement contributions, paying into social security, etc.
Look at how much money comes in per paycheck and know this number.
Depending on how often you get paid, this is the amount of money you have to spend and live off for the next two weeks or month.
Smartasset Paycheck Calculator compares identical salaries from two different states.
The calculator takes into account state taxes, deductions, withholdings, etc.
The take-home pay is different from the salary, depending on the state.
If a person makes $100,000, the monthly take-home pay in California is $5,639 (68%). In Washington, it is $6,265 (75%).
Whenever we have a promotion, I pay attention to how much extra money we have per paycheck instead of the monthly pay increase.
4. Identifies where every dollar goes
People do not track where every dollar goes, so they could be overspending and not even know it.
Use a budget to track all of your expenses. Small purchases add up quickly.
Once you start tracking your costs, you will identify what you are spending your money on and identify wasteful spending.
Writing all your expenses down will make you think twice about whether or not you want to spend the money.
Once I started tracking our budget in our new home, we found that we were spending an exuberant amount of money on eating out. Seeing these numbers told us we needed to eat out less to stay on budget.
5. Helps you increase your net worth
To increase your net worth, you need to get out of debt, cut out unnecessary expenses, and put your money in areas that will grow.
A budget can help you get organized and do all of this at once.
If you are in control of your budget, you can tell your money where to go.
If you are in debt, look at your budget to see where you can cut down expenses to put more money towards paying down debt.
If you are out of debt, put more money into areas that will grow your net worth, like retirement or brokerage accounts.
We prioritize increasing our net worth by paying ourselves first and putting money into things that will grow vs. shopping on Amazon.
Related Post: 9 Personal Finance Numbers to Master
6. Gives you self discipline
People avoid budgets because they are not disciplined enough, and they hate being told what to do.
People overuse the “I deserve it” mentality, and this mentality keeps people poor.
Create a realistic budget that you can stick to that meets your financial needs, family values, and family goals.
It takes a lot of self-discipline to stick to a budget, but it becomes a lifestyle change if it aligns with your values and goals.
If you stick to a budget long enough, you can see the results of your disciplined behavior through an increase in net worth.
We have been aware of our financial standing ever since we got married in 2016. We can see our net worth grow from year to year even though we do not make a six-figure income.
7. Reduces your financial stress
This CNBC article states that more than three in four Americans feel anxious about their financial situation.
Having a budget will help you create a plan to reduce financial stress.
When you make a budget, you tell yourself you have a certain amount set aside for your rent/mortgage, groceries, bills, gas, etc.
Instead of wondering where your money is going, your budget tells you exactly where it should go.
Having a plan before the money comes in will give you peace of mind and reduce your financial stress.
While researching preschools for our son, we found out that start-up fees cost between $800-$1000. Because we already budgeted for it, this cost did not cause us financial stress.
Related Post: 5 Disadvantages of Budgeting You Want to Know About and What to Do
8. Increases your savings rate
People do not pay themselves first. Often, they pay everything else and then hope to pay themselves if/when there is money leftover.
Budgeting will help you find money that is already there.
Once you decrease wasteful spending, you can put that money towards savings or investing.
Prioritize yourself and put your financial future first by paying yourself first.
When we started our financial journey, we were always looking for ways to increase our savings rate.
9. Gets you out of debt faster
Getting out of debt and staying out of debt will help you build wealth.
All your essential things must be paid, such as mortgage/rent, cell phone bills, water bills, gas, etc.
However, things such as eating out, clothing, and other frivolous expenses can be cut out and put towards your debt payment.
Budgeting propels your debt payment faster because you can easily find money with a budget since you know where the money is going.
We use our budget to help us get out of debt faster and to stay out of debt.
10. Improves your money habits
By the time you are an adult, you have already formed good and bad money habits that affect your overall financial wellness.
Budgeting helps you detect what your money habits are.
If you start writing down everything you spend money on, you find out quickly if you’re spending too much money on eating out or shopping.
Once you decide that you don’t care about that fancy cup of coffee from Starbucks and care more about going on vacation, you will improve your money habit by spending money on things you value vs. stuff you don’t care about.
One month, I noticed that I was spending $75 on take-out coffee. Because $75 is a lot, I changed my habits by making fewer trips to the coffee shop and ordering cheaper coffee.
Why do a family budget?
One of the most common stressors in a marriage and raising a family is money.
Often, partners do not talk about money enough, and each person takes on a different role and attitude towards finances.
These differences can negatively affect the family’s finances over time.
Talk to your spouse about money. Find out their feelings about money and how their families discussed money decisions while growing up.
Talk about your financial goals and dreams. It’s okay if they are different from one another, but best to know it sooner than later.
Develop a plan on how to meet those goals.
Begin with the end in mind, work your way backward and see what you need to do to meet those goals.
Understanding the purpose of a family budget can bring you and your spouse closer together because you work towards the same goals.
How to create a budget?
1. Calculate your net income
Net income is the amount of money that you are taking home in your paychecks.
This excludes taxes, deductions, health insurance, retirement contributions, etc.
2. Gather your expenses
Common expenses include:
- Rent/mortgage
- Loan payments (student loans, car loans, bank/personal loans)
- Insurance (life, health, auto, pet, renters/home)
- Utilities (water, electricity, garbage)
- Cell phone/landline
- Cable or other streaming services
- Gas/public transportation
- Childcare
- Groceries & household goods
- Subscriptions
- Gym or club memberships
- Eating out
- Entertainment (movies, events, concerts, going out with friends/family)
- Travel expenses
- Self-care
- Personal grooming
- Clothing
Look up your bank statements, credit card statements, investments accounts, utility or phone bills, loan statements, and receipts to get all of your expenses.
Gather the past 3-6 months of statements to get a good idea of how much things have cost you.
3. Determine your fixed expenses and variable expenses
Once you have determined your expenses, divide them into fixed and variable expenses.
Fixed expenses are expenses that you need to pay each month to live. These expenses included rent/mortgage, car loan, cell phone, insurance, etc.
These expenses are usually the same each month.
Variable expenses are expenses you can live without and should cut out first if you need more money. These include groceries & household goods, subscriptions, eating out, entertainment, etc.
These expenses vary from month to month.
To find the average expenses of each category, look at the most recent three months worth of spending.
You need to do some quick and easy math to get the average expenses for each category.
For example, for going out to eat expenses, add up all your going out to eat expenses during the past three months and divide by three.
4. Total monthly income and expenses
Compare your net income to your monthly expenses.
Ideally, you want to have the best-case scenario, which is when the income exceeds the expenses.
It means you have more money coming in than going out.
You have extra income, and you need to decide where the extra money will go.
If you have debt, you can make additional payments on your debt to pay it off faster.
If you need to save for an emergency or sinking fund, you can fund that with the extra money.
If you have no debt and your savings are fully funded, invest the extra money towards your retirement or a brokerage account.
Just the opposite is the worst-case scenario, which is when your expenses exceed your income.
It means you are spending more than you make.
It would be best if you change your habits.
5. Change habits accordingly
If your expenses exceed your income, you’re not living within your means, and more than likely, you are going into debt if you are not in it already.
Re-evaluate how much you are spending in the variable expenses category and reduce those costs.
Look at areas that you can cut down on so that you have more money for fixed expenses.
Changing your habits according to the budget will take time, but you have to be intentional about the change.
Conclusion
Budgeting is a financial tool to get you on your way to Financial Independence.
Imagine not needing to constantly think about paying your bills, saving, investing, or putting money aside.
Imagine not worrying about where your money went.
Imagine living within your means while loving the life you created for yourself and your family.
You feel calm. Your financial future is secure because of the things you are doing today.
Understanding the purpose of budgeting will automate your finances, provide financial security and help you build an intentional life.
Start the budget if you haven’t.
Stick to the budget if you’ve fallen off the bandwagon.
Leverage the money you have now through budgeting.
You can do it!
