The Importance of Budgets & Sticking To Them:
No one has enough money for everything that they want. But how do you know how much money you DO have for the things that you need and want? That’s where a budget comes in. Fiscally responsible people understand the importance of a making a budget, so they can clearly see and track their expenses, lessen their debt and determine their overall financial picture. A budget helps you see where you spend your money. This information can then be used to see what things you can afford and what things you can’t. Additionally, a budget can show you how much money you spend on unnecessary items – which, in turn, can help you make better financial decisions that can help you throughout your financial lifetime.
The key to an accurate budget plan is tracking your expenses. Everyone has expenses, but there are such things as necessary expenses and frivolous expenses.
Necessary Expenses are fixed – which means that they remain the same amount every month.
Some examples of Necessary Fixed expenses include: Rent, Loan Payments, Utility & Water bills, Property Taxes, Home & Car Insurance.
Frivolous Expenses are usually variable – which means that they change from month-to-month.
Some examples of Frivolous Variable expenses include: credit card bills, phone bills, cable TV bills, gasoline, groceries.
Many of these items may seem far from frivolous to you, but if you really think about it, they aren’t necessary or they can be reduced.
- Cable TV is not needed for survival – information can be obtained through the internet, or smaller cable TV packages can be purchased for less money (Do we really NEED 1,000+ channels?!)
- Phone bills can also be minimized with cheaper plans and restricted use.
- Gasoline costs can be minimized by combining trips or walking when appropriate.
- Groceries are essential, but the TYPE of groceries is NOT. Generics are cheaper than name-brands and shopping sales and using coupons can greatly reduce the amount spent on your grocery bill.
You can begin to see how informative a budget becomes when you start to really look at what you spend your money on.
So, now that you have a list of ALL of your expenses – start to categorize them as necessary and frivolous and track what you spend on them for the next 3 months. This will give you a better idea of your spending habits overall.
Now, make a budget plan.
Before you even look at the money you get from your paycheck, look at ways to put money aside BEFORE they go to your take-home paycheck – this will give you less to think about and most likely, lower your income taxes as well.
Some companies have commuter expense plans that allow you to take money out for commuting BEFORE taxes are taken. This may not seem like a lot, but every penny saved, is a penny earned.
Also, many companies offer a 401K plan for retirement. DO NOT FOOLISHLY NEGLECT THIS!! Many companies will match any contributions you make to your 401K plan up to a certain percentage. This is FREE MONEY that, when combined with your contributions, will grow over the course of your lifetime to be used for retirement.
For example, if you decide to contribute 10% of your income to your 401K plan and your company will match that amount – you have now DOUBLED your contributions to 20%. (The last time I looked, NO financial institution has a 100% return on any investment!)
Although many young people feel like they have the time to put off saving for retirement, THEY ARE WRONG. Saving in your 20’s rather than your 30’s will significantly grow your contributions, potentially earning you THOUSANDS of dollars more in just those few years.
Even though your take-home pay may be less, the benefits for some of these pre-tax programs far exceed the costs.
Once you have your take-home paycheck amount, you can begin to allocate money to your necessary expenses.
Rent or home ownership should not exceed 30% of your income.
Car loan payments should not exceed 15% of your income.
That leaves you with 55% of your income left.
Look at the rest of your expenses and try to determine where you can save some money;
- Finding cheaper cable TV and phone plans
- Shop sales and use grocery coupons
- Conserve gasoline with combined car trips
- Conserve oil and electricity by lowering the thermostat and turning off lights
- Brown-bagging lunch, eating in, etc.
Then look at all the things that you spend money on that are COMPLETELY UNNECESSARY.
- Designer clothes and shoes
- Dining out
- Concerts & Sporting events
- Video games
- ….. the list goes on and on.
Treat yourself once in a while….but making small sacrifices now will help you have financial security later.
Remember: The definition of a good life is to have all the things you NEED and a FEW things you WANT. Working toward a goal of financial independence will help you achieve true success…. And appreciate & value the hard work necessary for the process.