Creating a personal budget may sound like a way to restrict yourself from spending money on things you don’t need. In reality, you are simply telling your money exactly where you want it to go. You can allocate a specified amount for fun and spontaneity, while still meeting financial goals. Check out the benefits of personal budgeting below to learn more about why you should create a customized plan for your finances.
One of the most common reasons a person has for creating a budget is to get rid of debt. Making a plan in advance is a great way to reach this goal, as well as helping you avoid excessive debt in the future. When you use a budget, you become more aware of what you are spending your money on each month. You can use this information to cut back on unnecessary items, or use that money more intentionally.
Some types of debt can be helpful to your financial situation, such as a home loan, automobile loan, or student loan. One of the best benefits of personal budgeting is that you will know exactly how much debt you can afford without going overboard. It will also help you to weigh out whether the payment amounts, interest rates, and time commitments are worth it in the long run.
A great practice when budgeting is to automatically send a predetermined percentage of your income straight into a savings account. This will help you to prepare for unexpected expenses such as car repairs or a job loss. Start with a goal that feels reasonable and attainable, such as $1,000 that you will only use if absolutely necessary. When you have reached this goal, shoot for one month of income, then two to three months.
If you already have a few months of income saved in case of emergency, your habit of automatically saving will allow you to take vacations, have new experiences, or purchase items that can simplify and enhance your lifestyle.
Create Good Habits
When you decide ahead of time what your money will be used for, it is much easier to reach financial goals. One recommended approach is a zero-based budget, where you designate an item or category for every cent of your income. After bills are paid, how much will you spend on entertainment or miscellaneous items? If you find you still have money left after allocating for expenses and recreation, use it to put more into savings or pay down debt more quickly.
While it may sound restrictive, this habit actually creates more freedom and opportunity for fun. When you come across something you want, you will most likely already have the funds set aside to pay for it.
Many people live a “paycheck-to-paycheck” lifestyle, with just enough to pay the bills. When an emergency expense arises, it can cause a great deal of stress, as well as put them further into debt. They also miss out on fun activities they can’t afford. The sooner you start telling your money where to go, instead of the other way around, the sooner you will get out of this rut and reap the benefits of personal budgeting.
In addition to being more intentional about how you spend your money, you will be less likely to miss payments. Have you ever forgotten to pay a bill or missed a due date? There are few things in life more irritating than late fees. Fortunately, keeping track of income and expenses will also help you keep track of due dates and recurring payments. This way you can avoid that feeling of wasting your hard-earned dollars because of a small oversight.
You will also have a “big-picture” view when it comes to finances. For example, it will be easier to round up all your medical bills in one place and you will know the total amount owed. Oftentimes, you can set up assistance plans to pay this type of bill without worrying about how to pay for everything at once. Staying organized and in touch with collectors will help you maintain good credit, which can also have a positive impact on future finances.
Get more tips for financial freedom from CreditAnswers. Learn more about how to stick to a budget by creating one that is right for you, and enjoy the benefits of personal budgeting today!