Whether you are rich or poor, love money or hate money, you need a budget. Everyone needs a budget. In fact, those who are most successful financially have and follow a budget. There are plenty of reasons to follow a budget.
Before I elaborate in more detail, I want you to do something for me. I want you to erase any negative thoughts you have associated with the word “budget”. Whatever negative or unsuccessful experiences you’ve had in the past with a budget, forget about them. They don’t exist. You are on a clean, neutral slate when you hear/see/read the word “budget”.
Now that we’ve gotten that cleared up, I’m going to break down exactly what a budget is, and share why you should set and follow a budget this year. Forever gone are the days of not having a budget, hating the thought of having a budget, and feeling “broke and poor” while you are on a budget. I had to go through that mental clarity myself about 7 years ago, and I’ve been much better off since.
First, what the heck is a budget?
Simply put, a budget is a tool that shows you what money you have coming in, what money you should have going out, and what is left over. That’s it. What is negative about a tool? In fact, a tool is extremely helpful. According to Dictionary.com, a tool is something used in performing an operation or necessary in the practice of a vocation or profession. In personal terms, a budget is a tool that aids in your financial success.
Getting into more specifics, a budget needs the following:
- Income
- Expenses
- Debts
- Savings
I recommend clients create a budget on a monthly basis, especially since most bills are paid monthly, but the option is up to you. You can create your budget for weekly, bi-weekly, monthly or quarterly use. Any longer than a quarter could result in inaccuracies – life changes way too frequently to base your budget on annual or semi-annual terms.
For the sake of this article, I’m going to refer to creating a monthly budget. When you create your budget, you will want to include the four categories specified above. Ask yourself:
- What income am I bringing in this month?
- What expenses do I have to pay for this month?
- How much needs to go towards debt payments this month?
- How much am I scheduled to save this month?
You always want to start with your income. Since you should never be spending more than you earn, your income is your limit. You absolutely cannot spend more than you make in a month’s timeframe. If you will bring home $5,000 this month, specify that. Next, write out all of your expenses that come out on a monthly basis. Download the Budget Category Checklist for a list of expense categories found in most budgets.
Once you have all of your expenses outlined, add them up. Make sure you include minimum payments for your debts, and any saving amounts that are scheduled. You also want to include expenses that aren’t set in stone, things like: groceries, gas, dining out, etc. How much do all of these numbers add up to? If everything adds up to $5000 or less, hurray! Put the extra towards debt or in to savings. If your expenses exceed $5000, something needs to go. Cancel your cable, downgrade your cell phone plan. Do what you need to do to make sure your expenses for the month don’t exceed your income for the month.
Don’t make the act of creating a budget more difficult than it is. Be honest with yourself, and list out everything you spend money on consistently. If you need to, look back over your old bank statements to make sure nothing has slipped through the cracks. Once you have your budget outlined, you can make tweaks based on your financial goals. You can cut out or cut back the dining out spending to save an extra $100/month. Whatever tweaks you make, hold true to them.
Reasons to Follow a Budget
#1 Following a budget helps you plan ahead
“Raya has been such a help getting my finances back on track! Before working with her, I was barely able to save, and pay off my credit card & loan debt and was pretty much living paycheck to paycheck. By having our weekly sessions, we were able to pinpoint where exactly my money was going and found areas that I could cut back my spending on. Raya was also great at making me look ahead of my budget to avoid times where my budget and progress would take a financial hit (i.e. planning ahead for travelling or vacations, or buying flight tickets). Working with Raya helped me to pay off over $3,000 worth of credit card debt and loans. If you are on the fence about taking this jump, I highly recommend you go to Raya to help you snatch your finances back into shape!”
That testimonial came from my client Isabelle. She realized that having a budget opens the door for her to plan vacations, buy flight tickets, and purchase birthday gifts without falling short. Since following a budget requires you to think about future purchases and things that need to be achieved, you can adjust your budget to help save for those purchases early. Following a budget helps you plan ahead and afford upcoming and one-off expenses.
#2 Following a budget helps you see where your money is going
A lack of clarity in your finances leads to a loss of money. Have you ever wondered “where did all my money go?” a few days after pay day? If you don’t follow a budget, it’s easy for money to slip through the cracks. When you follow a budget, you can account for where your money goes. You’ve already designated how much you can afford to spend in each area, so you never have to wonder where money actually went. This is one of the most important reasons to follow a budget.
#3 Following a budget helps you see your savings potential
“I stuck with the plan that Raya set up for me and ended up reaching my goal of saving $10,000 in my emergency fund! Thanks to my CGS budget plan and thanks in part to a generous tax refund, not dipping into my emergency fund unless I absolutely had to, and saving an extra $70 per pay period towards the end, I was able to reach my goal a full 9 months early! Now that I have an emergency fund I’m ready to start saving for a down payment on a house. Thank you so much for your help!”
That testimonial came from my client Caitlin. Caitlin had me create a budget plan for her to help her reach her savings goal. Caitlin’s budget showed when she could reach her savings goal, based on her current situation. Sure, things like a nice tax refund helped her reach her goal earlier, but without her budget, she wouldn’t have had that roadmap to reach her goal. Your budget shows you what your savings potential is. You can alter and adjust your spending to save more or reach a specific goal by a certain date.
#4 Following a budget helps you take control of your finances
Imagine how much clarity will come to your life when you have a budget that shows what you can afford to spend, save and put towards debt? A budget gives you that clarity, and that clarity translates into control of your finances. Your money is no longer controlling you, you are controlling your money. You are telling your money where to go. You can control if you choose to put that money elsewhere. It’s all in your hands now, because YOU created that budget.
#5 Following a budget gives your money “purpose” and makes your spending “intentional”
Along with you taking control of your finances, you are no longer spending money aimlessly. Money isn’t leaving your bank account without reason. Every dollar outlined in your budget has a purpose. That purpose could be a Starbucks latte every week, or a monthly Netflix subscription. Your spending is not intentional because your spending is outlined in your budget.
#6 Following a budget helps you reach your goals
The last reason you should follow a budget this year (and every year moving forward) is because it will help you reach your goals. If you are desperately trying to pay off debt, your budget will help show you how and when you can pay each credit card off. Your budget will show you if you need to bring in more money so you can get rid of those credit card balances faster. Your budget is the roadmap that you need to follow to achieve the things you want in life.
A budget is incredibly liberating, not confining. From this point forward, a budget is a tool that will help you reach your goals, and that’s a great thing. A budget is a great thing! If you need help creating a budget, I specialize in creating realistic budget plans for clients. Don’t procrastinate your financial success because you don’t know where to start. Make the investment in yourself and in achieving your goals. Start your budget now.
If you already have a budget, I hope this article encourages you to follow it. Make adjustments if you need to, but always follow the plan you set for your money. Over time, you will see how impactful following a budget can be. What negative associations DID you have with the word budget? What’s stopping you from following a budget? Ask questions and share your budget experiences with me and other CGS readers by leaving a comment below.
