In today’s tough economic times it makes sense to create a budget to keep control of your finances. Financial emergencies can come in all shapes and sizes and you have to be able to take care of your family, enjoy a comfortable retirement, take advantage of an investment opportunity or just avoid seeing your credit getting ruined or filling for bankruptcy. Even if you feel restricted only in the thought of budgeting, the truth of the matter is that if you go along with the right attitude you will offer yourself savings and you will be able to fix your credit score as well.
The main idea of budgeting is straightforward: you cannot spend more than you earn. In theory, it’s easier said than done and there are many occasions that you will overspend your money out of impulse, boredom, or just because a new credit card has arrived in your mailbox with favorable credit terms. Yet, by keeping a budget, you will be able to spend your money in a controlled way, allowing yourself to cover your expenses and save money on a regular basis.
Here are some key reasons that stress the importance of keeping a budget:
1) Financial direction
Having a budget can help you have financial direction. If you plan to buy a house in two years you have to develop suitable financial strategies and follow specific guidelines to accomplish this goal. This requires being on the right track and keeping your finances within your budget to ensure success. Besides, by setting up a budget you can periodically measure your progress and make any necessary changes.
2) Financial control
Having a budget can help you have financial control. By knowing exactly how much money you spend on fixed expenses including rent or mortgage, gas, utilities, and insurance you can adjust your variable expenses accordingly and spend less on groceries, entertainment or personal care. In that way, you know what you can afford and you can use your credit card or get a loan only for special purchases.
Having a budget can help you save. By keeping track of your finances every month and adjusting your variable expenses accordingly you can save money. These savings can be used for starting an emergency fund to anticipate any sort of financial emergencies, or as a down-payment for the house you plan to buy in two years. In any case, a budget encourages moderate spending.
4) Financial emergencies
Having a budget can help you have instant money to anticipate financial emergencies. If a large medical bill comes up or you have to anticipate a sudden car or home repair, you are more likely to have that money at hand by keeping a budget rather than by not. By keeping a realistic budget you can get prepared to anticipate difficult situations.
5) Improved credit score
Having a budget can help you improve or fix your credit score. By seeing how much money you have left each month after paying your fixed expenses you can start paying off your debt and put more money on your credit card. Many people believe that paying the minimum installments is enough to lower the interest rate on their credit card. This is wrong. Every extra dollar you put toward your credit card balance leads to paying less in interest rates over time. Ultimately, your credit score is improved.
6) Informed purchases
Having a budget can help you become an informed shopper. By identifying items that cost too much or are not essential to your household you buy only what you need or you are able to identify essential items at a better price.
7) Asset allocation
Having a budget can help you become your own financial guru, offering advice to yourself on how you should allocate your money. By having a clear picture on how you spend your money every month and what is left you can decide how much money you can put on savings and how much on investments.
Overall, a budget is your financial guide that can identify the areas where you are spending too much. By keeping a realistic budget you are entitled with the planning and discipline required making well-informed decisions about your financial future. Moreover, a budget forces you to be realistic about your financial situation without depriving you from the fun of buying things for yourself. In contrast, it gives you a greater freedom to spend your money on items you really need and want without putting your financial future at stake.