Almost a year ago, I wrote an article about creating a budget, and I even linked to my own sample spreadsheet. But budgeting is such an important personal finance basic that I’m going to write a whole new article about budgeting.
Not all of us have near limitless money to buy anything we want. Therefore, if you want one thing, you’re going to have to sacrifice something else. Even if you’re using a credit card, you only have a limited credit line (even the Centurion card has its limits). Therefore, you really need to know how much money you have before you know how much you can spend on things you want or need. We call this...
Through financial planning, we determine how much money we have coming in, as well as on-hand. We can get the most from that income by earmarking it for specific uses, such as spending, saving, investing and giving. By knowing where your money goes (i.e your expenses), you can realize your wasteful habits, spending patterns, inefficiencies (too many ATM runs), and room for improvement.
By planning your finances, you can take a lot of stress and burden off your shoulders because you have educated yourself about, well, yourself. You know more about your own life through your spending, and your finances are more transparent to you. For some of us, we live paycheck-to-paycheck, only thinking about that final number in the checkbook. By budgeting and planning, you expand your vision from just the checkbook to your entire past, present and future.
Our entire financial plan begins with the following elements:
- Fixed Expenses
- Variable Expenses
From those 3 items, we can glean enough information to create a baseline budget. In addition, we can identify “Disposable Income” that isn’t already accounted for, and use it for other purposes such as opening a Roth IRA, establishing an emergency fund, paying down debt, or donating to your favorite charity.
For the specific steps for budgeting, I’ll again refer to my article “Fixing Your Money Mistakes” Create a Budget“. For now, though, I’ll keep it on a high level and just reiterate that a budget is your financial lifeline. You can’t build a house without a blueprint, and in the personal finance world, that blueprint is your budget.