Creating a sound sustainable financial life is having a plan and staying true to it. For most of us the foundation for meeting both short-term and long-term financial goals is a budget. Yes, a budget. But don't worry, budgets aren't scary and are pretty easy to create and track.
So what does a budget do for you? If your income or the money you receive each month from your job, Investments or other sources is greater than your expenses congratulations you have extra money for savings. But if you're like most Americans you are spending more than you're taking in. The greatest benefit of having budget is the ability to understand your financial reality and to see if you can not only live within your means but also build a strong foundation for your financial future. A budget is just a tool that lets you see things in black and white or red so you can get the most out of your life now and in the years ahead.
First you need to track your income and your spending. A spreadsheet is ideal for this sort of thing. Basically it is a list on a piece of paper. Start by adding up every source of income you have each month that actually goes into your pocket after all deductions like taxes insurance and 401K contributions. The total is your total income or cash inflow, the take home cash you have to work with.
Next, write down all your basic essential living expenses, housing, utilities, phone, transportation, food, clothing, daycare, entertainment and other related expenses. Now add in your obligations, those recurring contractual payments owed to banks, mortgage companies and other creditors. These are your debt payments. Now you have the big picture. You'll know immediately if you were overextended on the essentials or if you have some extra cash for savings (paying yourself first).
This step is very important because as you add in your other spending you will know immediately if you are either living within your means or you're not and importantly you can see where you may need to make some changes. This is where building a budget gives you the tools for both scenarios.
You can then use your budget as part of a strategy to build your financial plan by setting goals and allocating money each month for savings, investments, emergencies and major purchases or you can build a budget that allows you to live within your means. This will help in determining how much you spend on what. Once you have established your budget you can pay down debt, free up money to start saving, plan for major purchases. Building a smart budget will provide access to more favorable rates on loans and other credit. We know just building a budget won't solve your financial problems or guarantee success in achieving all your goals but we do know that for most Americans a budget is essential in building and maintaining a healthy financial life right now and for the future.