Why Do I Need A Budget?

Why Do I Need A Budget?

January 11, 2022
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Budgeting not only helps you stay in control of your money, but it can help you save for a financial goal. By having a clear understanding of your personal finances and financial behavior, you can look to change any bad habits. This will help you weather any financial storm, such as losing your job. 

Almost two-thirds (67%) of those who suffered a loss of income due to the pandemic were worried about being unable to pay a large, unexpected bill. If you don’t have a budget, it can be hard to know whether or not you can afford to spend your money; whether that’s on a ‘want’ or a ‘need.

HOW TO GET STARTED

Although establishing a budget may make you feel restricted with your spending, it's important to stay focused on your ultimate financial goal. Where do you want to be financially? A budget will provide a strategy or game plan for how your money will be allocated.

Start by adding up all the income that you have coming in each month, which includes your pay check, child support and any other supplemental income. Also, include any benefits, pensions, investments, or rental income.

Next, list your monthly bills or obligations. Create different categories for your mortgage or rent, utility bills, etc. Remember to include debts, such as credit card, auto or personal loan payments. 

Create a separate category, "Fun and Entertainment" - for example, trips to the theatre, fine dining, shopping, travel or spending on hobbies and interests. It’s important to note that having a budget isn’t an exercise in denying yourself all the pleasures in life, but rather a "spending plan" that provides a clearer picture of your financial situation. 

USE A BUDGETING APP

For those who feel spreadsheets and lists sound like too much of a bother, there are plenty of apps that you can use to conveniently set up a budget. Finance apps such as Mint and Fudget, for example, can link to your bank account and help determine how much you can afford to save. These platforms also provide suggestions on where you might be able to cut back. 

HAVE CLEAR FINANCIAL GOALS

A good way to stay on track is to set clear financial goals. Having a clearly defined financial goal, whether it's taking a vacation, getting out of debt, or saving for a comfortable retirement, will keep you motivated during those times where you may be tempted to go on a shopping spree. 

Although more than 50% of Americans feel comfortable setting long-term saving goals, a sizable number don’t feel that their goals are achievable. Only by becoming familiar with your financial situation, will you be able to know how realistic and achievable your goals are.

One important thing about saving money is that it’s never too soon or too late to start. Again, the first step is to remember your financial goals; where do you want to be financially and when?

ADJUST YOUR SPENDING

Now that you know where your money is going, look to see where you can cut back. Think about what really brings you joy and try to maintain as many of those items or activities as you can.

Cancel the subscriptions that you barely use, switch to generic brand supermarket food and see if you notice the difference. Ok, it was just a suggestion you foodies! Check your spending regularly to make sure you are getting the best deals.

Take a quick look through your online bank transactions and credit card statements weekly to monitor any regular payments that come out. You may be surprised at some of the things you are still paying for, but don’t need or use anymore.

If you have not done so already, sign up for online banking. This allows easy access to your accounts. However, make sure your bank isn't charging you a "Paper Statement" fee. Some banks will charge $3 per month to pay the cost of sending you a statement in the mail. You have to specifically cancel this transaction. 

PAY OFF YOUR DEBT

Now that you know where you can cut back, divert that money to paying off more of your debt. Even if you are comfortably managing your payments every month, paying them off faster means you will pay less overall interest—money that could go towards achieving your financial goals.

Write down all of the debts you owe and prioritize them. The consequences of not paying back some debts are more serious than others. Your mortgage or rent, food, taxes and energy bills need to be paid first.

Debts such as credit cards, personal loans and Buy Now, Pay Later (BNPL), while important and potentially very expensive, are considered secondary. 

SAVE SAVE SAVE

Once you have your debt under control, it is vital to build up that emergency savings fund. Our recommendations are that you should aim to have enough to cover 6-12 months of living expenses in an interest bearing checking account or money market fund.

Lots of people like to follow the simple 50/30/20 rule to help them manage their money. You divide your monthly income into three pots: 50% for your essential spending such as rent and bills, 30% is for your wants, while 20% goes towards saving or paying off debt.

HOW TO STICK TO A BUDGET

Sticking to a budget can be particularly difficult if you are self-employed and have irregular income, but others may get blown off course by unexpected bills or, in some cases, they can’t resist an impulse buy! No one is perfect.

Every now and then, we all may deviate from our budget. The important thing is how you deal with any overspending and that you get back on track. The simple act of drawing up a budget is a statement of intent to yourself that you plan to take control of and engage more with your finances. 

1) Boost your income

Start a side hustle, such as an Uber driver, selling Mary Kay, Instacart, or a private consulting practice. You could set up your own website or Facebook profile page. Market your services on social media. Any additional income earned should be applied to either your debt or your other financial goals.

2) Monitor your progress regularly

Drawing up a budget isn’t enough. Consider looking over your budget at least monthly to ensure no bad habits have returned. In the event your personal circumstances may have changed, be open-minded and adjust your budget accordingly.

If you have any questions or would like to schedule a free consultation, please click on the link below:

https://calendly.com/gowdyfinancialgroup/30-minute-consultation