Planning your finances
If you have dreams of buying a house, settling a loan you have taken, going on an exotic vacation, or having a comfortable retirement, planning is vital.
And the first step to securing your future is to be aware of how you spend your money. A personal budget is a handy way to understand your spending and plan ways to save.
Here are five reasons you for you to make a budget
- To set and reach financial goals. When you understand how you get money and where it goes (inflow and out flow of money), you can better plan how to reach your financial goals.
- To spend according to your priorities. When you know for what you spend and where your money goes, you will be able to cut down your unnecessary expenditure. When you cut down your expenditure you are in a better position to route these funds to other priorities in your life.
- To build wealth. Once you have a clear view of your overall financial picture, you can shift your focus to eliminating debts and building wealth.
- To plan for retirement. Planning for your retirement is so vital to your future that it warrants special attention. Understanding your current income and expenses will help you plan for your retirement effectively.
- Peace of mind. When you know your finances perfectly, you have a better understanding on what you can spend on and what to avoid. This will ensure that you spend only on what you actually need and avoid empty purse situations.
Creating and following a budget involves self-discipline and sacrifice, but will help you develop wise spending habits to better manage your finances now and into the future. Keep your budget current by updating it regularly to reflect changes in your situation, such as a raise, marriage, or new home.
Creating a budget
The first step to saving more efficiently is to keep track of what you spend and budget. There are many different ways to do this, you can try a few out and choose the system that works best for you. The key to saving successfully is to find a system that works for you and to stick with it.
Step one: Keep track of what you spend
We pay for the items we need in many different ways - we spend cash, pay through credit or debit cards, and we even auto-pay bills. It’s important that you understand and develop a method through which you capture all payments you made through these different methods.
Luckily, there are digital tools to help you keep track of your spending. Look for free tools that will group all your spending in one place. Take a look at a couple months of spending. Total up everything you spent and divide your spending into large categories –housing, food, utilities, entertainment, shopping, savings, and everything else.
Step two: Create your budget
Now you know where your money is actually going. But is it going where it should? Create a budget that you can stick to. Look at places you can cut back in order to pay down high-interest debt and save. Not sure where your money should be going?
Step three: Stick to your Budget
Putting together a budget is easy: the harder part is sticking to it. The key to this is to go back to step one and keep track of your spending. Each week, check your finances to make sure you are staying within your budget. You can do this by using a cash, or envelope system, for example having one envelope for the money you save. one for the money you spend, and a third for money you donate. You can also keep track with a software program, online financial management tool, or mobile app – or you can simply use pen and paper to keep track of your spending.
No matter how you do it, it’s important to find a system that works for you and stick to it.
Benefits of budgeting
Although budgeting is indeed more work, it pays off with many life-enhancing benefits
- It will give you control over your money
- Keeps you focused on your money goals
- Makes you aware what is going on with your money
- Helps you organize your spending and savings
- Makes you decide in advance how your money will work for you
- Enables you to save for expected and unexpected costs
- Enables you to communicate with your significant others about
- Provides you with an early warning for potential problems
- Helps you determine if you can take debt and how much
- Enables you to produce extra money
