Getting a grip on your finances is one of the most important things that a person can do. One of the scariest statistics around is that many people are one paycheck away from being out on the street.
Many people live from month to month and have no savings. They don’t even have a plan about investing money or how to minimize their expenses while trying to increase their income. One of the first things that finance schools teach you is that you need to write all of your expenses and income down.
This is where a budget comes in.
If you don’t have a written plan, you can’t track it. The numbers will be in your head, and you’ll wonder why they never add up at the end of the month.
People who want to get a grip on their finances need to use a budget. It helps them to understand all the expenses fully. Moreover, it helps them to track if they are sticking to those numbers or veering too far from the track.
So let’s delve deeper into the art of budgeting to determine everything a person needs to know about it.
What Is a Budget?
If you look up the definition of a budget on Investopedia, you’ll see that it’s an estimation of revenue and expenses over a specific future period. People who compile budgets re-evaluate it periodically.
The easiest way to define it is by saying that it’s a spending plan, which allows you to determine in advance if you’re going to have sufficient money to pay expenses and do the things that you want to do.
It’s not only individuals who compose a budget for themselves. You can create a budget for your family, a group of people, and a business. Even countries formulate budgets. If they didn’t, how would they track what they need to spend their money on and how much income they’re going to receive?
Think about it this way. Since a country places such importance on a budget, shouldn’t you?
Once you’ve compiled your income and expenses, here are some of the essential concepts to grasp. A balanced budget means that your income is expected to equal the expenses. A deficit budget means that the expenses will exceed the income, and a surplus budget is when your income exceeds the expenses.
Without knowing your cash flow, you could be potentially putting yourself in a financial predicament.
Strategies To Budget
It’s one thing to set out the numbers on a spreadsheet and to wish for the best, but it’s an entirely different world to stick to those numbers.
The whole point of a budget is to abide by those numbers or make them better. That means reducing your estimated expenses and increasing your income. If you don’t, at the very least, stick to your numbers, you’re going to have a deficit budget.
There are strategies to deploy that ensure you stick to the plotted numbers. Here are some ways that will help you to abide by your budget.
Make Automatic Payments
What does that mean? As human beings, we have a natural tendency to spend money as soon as we get it. Those spendings are usually on things that don’t build our wealth. The more money we have, the more we tend to spend on frivolous things.
Making automatic payments means instructing your bank to make fixed payments for the most important expenses such as rent, student loans, and even to an investment account. This concept is essential as it ensures that all of your main costs are covered before you spend the rest.
The problem with most people is that they first spend and then invest the rest, which is nothing because they’ve spent everything. Most rich people first invest, then spend the remainder.
A key concept that you should integrate into this strategy is changing your due dates. If all of your expenses are due on the first of the month, it might be difficult for you to get through the rest of the month because you might not have money.
Speak to your borrowers about shifting expenses such as your car or student loan payment to the middle of the month. That gives you a chance to break up your expenses.
I’m sure that you’ve heard of the saying, “Cash is king.” Of course, it is. When we talk about cash in this context, we’re not referring to avoiding debt. That’s one of the things that you should do, but it does not form part of our discussion.
You have to pay for your expenses, whether it’s with cash or finance from institutions. Here’s the reason that you should do it with cash.
Most of us spend far less money when we pay with cash than with a debit or credit card. Why? It’s because we can see the money leaving our hands. You can’t see the money leaving when you pay with plastic.
Here’s what studies have concluded.
Part of the brain triggers painful feelings when we see cash leave our hands. Releasing cash from your hands is like touching a hot stove. You’re not inclined to do it, or you do it only when you have to.
Here’s what happens when we use debit or credit cards.
We don’t see the cash leave our hands, so the brain doesn’t trigger any feelings of guilt or pain. Since we don’t feel any consequences, we’re more likely to overindulge. There’s another significant aspect that plays a role in using plastic and cash. It’s got to do with trade.
If I go to a shop and pay with cash, I give the teller the cash to get the items. There’s an exchange, but the money has left my hands. With plastic, I give a card to get the goods, but I also get the card back. It left my hands only temporarily.
Hold Yourself Accountable
There have to be consequences for your actions. Since it’s your money and you decide how to spend it, the only person who can hold you accountable is yourself.
How do you do that?
If you don’t stick to the budget, you have to punish yourself. When you composed the budget, you would’ve allocated some of your money to leisure or recreational activities. One of the ways to punish yourself if you’ve gone into a deficit budget is by eliminating your leisure or recreational activities from next month’s budget. That means no more fun next month because you need to make up for the shortfall.
That’s one of the ways. Another way is to increase your income. If you’ve exceeded your expenses, you have to make up for it by increasing your income. That could mean getting a second job or take extra shifts with your present employer.
The reason for holding yourself accountable is so important is that you feel the pinch when you don’t abide by the budget. If there aren’t any consequences, you’re going to keep violating the budget — what’s the point of it if you don’t stick to it?
The point of having a budget is to track your income and expenses. You should be doing that weekly or monthly. If the budget that you’ve initially composed isn’t working out, you need to re-evaluate it.
Maybe you’re unreasonable on your grocery expenses to the point where you’ve tightened the spending so much that you don’t have food at the end of the month. A re-evaluation doesn’t always mean that you’ve stepped over the boundary.
You might need to re-evaluate a budget when things are going well. If you’re not spending on groceries as much as you thought and you’ve got plenty of food, you can direct a portion of that expense to pay your loans.
There’s no point in overspending in one area and letting that money go to waste when you could’ve channeled that money to reduce your expenses.
Who Should Do It?
Everybody. It’s not only restricted to adults who have bills to pay or companies who need to track their expenses. Even teenagers should do it. If they want to go on an excursion, they need to list all of their expenses to see how much money they need.
Teenagers need a monthly budget to see how much they need to go out every weekend, to determine the data they need for the internet and so forth.
It’s almost impossible to save money without a budget. If you don’t have a budget, how do you know how much you need to make in order to save?
When ING Direct and Capital One conducted a poll in 2012, they found that 87 percent of teens don’t know anything about managing money. Learning about money should start when you’re young. If your parents didn’t teach you about how to manage money, how would you know it when you’re an adult?
When National Endowment for Financial Education conducted a study, they found that only 24 percent of millennials have basic financial literacy.
Since many people don’t budget, they end up in financial difficulty. When that happens, the only option for them is to take out debt to cover the shortfall.
So now you understand the importance of a budget. Those who fail to plan are the ones who plan to fail. That’s what happens most of the time when you don’t have a budget.
Not being able to track your expenses is like being a ship at sea without a crew on. The financial tides will sway you in whichever direction they want. In most cases, it’s in an unfavorable direction.
Preparing a budget doesn’t start at a specific age. The younger you start, the better. As you’ve seen with the statistics above, many people fail because they didn’t set out a budget. They either run out of money or end up in debt or both.