Creating a budget is a smart financial move, and will help you to you to plan, monitor, and adjust your finances to fit your lifestyle. By assigning yourself a financial framework, you are designing the contours of your life.
There are many different types of budgeting rules and mechanisms, but they all have the common denominator of allowing you to make informed financial decisions by being intentional with your monies. Here are five reasons why creating a budget is simply a smart financial move.
Understand Your Finances
Before you make any financial decisions, you first need to understand your circumstances. Looking at both your after-tax income and your needs will help you uncover how much discretionary income you have at your disposal.
There are certain essential items that you simply must allocate resources towards covering, such as rent, food, and other needs. Start with these to make sure that you are taking care of the basics.
You can also think of this exercise as an opportunity to review your other purchases, and whether or not they are worth the money that you are paying for them.
Cut Out Unnecessary Purchases
The joys of consumption are often overshadowed by regret after the fact. All of us have experiences making purchases that we eventually realized were not right for us.
Creating a budget allows you to view how you are spending your money in clear, unemotional, black-and-white terms. You may find yourself surprised that over the past few months you have spent hundreds of dollars on pizza, coffee, and other comforts. These items did not seem like major expenses when you bought them, but they add up into larger costs over time.
Realizing how you are spending your money will allow you to be more intentional about your expenses, removing certain line items from your daily, weekly, or monthly budget. You will be in charge of how you are navigating your finances, giving you a real sense of control over your destiny.
Make Plans for the Future
Whatever your future goals and objectives, your finances will play an integral role in helping you reach them. Wise individuals understand that a goal without a plan is just a wish, and deciding on concrete steps will help you to turn your desires into attainable objectives.
Perhaps your dream is to become a homeowner, or maybe you are yearning to take a trip around the world. Whatever your hopes are, making a budget will allow you to begin devoting your resources towards reaching these goals.
There are a number of different budgeting techniques that are in common use, such as the 50-30-20 budgeting rule whereby 50% of your monies are devoted for needs, 30% for wants, and 20% is allocated for savings or paying off debts. Whichever rubric you decide to follow, having a framework that fits with your individual circumstances can help you realize your future plans.
Save for Retirement
Money is a limited resource by definition, and there is often a trade-off between current wants and future desires.
The importance of squirreling monies away for a hazy future down the road is often placed in the background. For this reason, the government has granted tax privileges to a number of different investment vehicles that are designed to help save for retirement, such as 401(k) plans and IRAs.
Creating a budget is a tried and true way to ensure that you are dedicating funds for your future retirement needs every single month. For those who are enrolled in 401(k) plans via their employers this happens automatically, but even those who are not would do well to devote planned portions of their paychecks to their retirements accounts.
Thinking about the future is important. So is managing your day-to-day finances so that you do not spend more than you can afford.
Avoid Going into Debt
The widespread use of credit cards has allowed individuals to spend money without thinking of the repercussions, both immediate and long-term.
A budget can set the parameters for your monthly spending, helping you to avoid the perils of owing more than you can afford. The dangers of the debt trap are profound, and getting out of credit card debt in particular can be a steep climb. Many credit card companies compound debt on a daily basis, causing it to increase dramatically.
Placing limitations on your spending can provide a source of comfort, propelling the decision-making process into a straightforward equation. If you do not have the finances available according to your budget, do not make the purchase. It really is as simple as that.
Conclusion: Budgeting Your Way to Financial Health
Budgeting is akin to creating a roadmap for your finances. It will enable you to devote your resources towards your chosen priorities, and realign your spending when the two are out of sync.
There are plenty of reasons for creating a budget, but the single most important one is that it will put you in charge of your financial destiny. It will help you to control how you live your life, now and into the future.
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