You know that “B word” that can be so scary that people often shy away from it? That’s right – budgeting. There are endless amounts of resources, blogs, articles, professionals, you name it, to help you do it, but in fact only 1/3 of Americans actually maintain a household budget. (1) What’s even more surprising is that 19% have no emergency fund whatsoever and almost half of Americans state they feel “concerned, anxious or fearful about their current financial well-being.”
That’s pretty scary, but luckily a budget doesn’t need to be. A budget is simply an estimate of income and spending for a set period of time. It’s a tool to ensure you are actively managing your finances and remain in control of your life. Considering money is one of the top reasons marriages end or families fight, now is the time to get moving on the right track. Here are 6 important reasons why:
- Be Active (not Passive) About Where Your Money Goes – by simply going through the exercise of setting up guardrails on your categories of spending, it helps reel it in and keeps things in perspective. Of course, financial priorities and spending can change or that impulse buy can get the best of you, but that is where you can pivot and adjust accordingly. The key is to proactively manage and have an idea of where you money goes (rather than after-the-fact or months down the line when it may be too late). Even if you track your spending at a very high level, the important thing is to know where it is going and how you may need to adjust. A budget sets a more realistic overlay onto your finances so you can manage it and your life accordingly.
- Achieve Peace of Mind – having peace of mind is something everyone is constantly striving for, so why not set yourself up for success now to achieve it? By creating a budget and consistently monitoring it and adjusting accordingly, you implement a positive framework to live by. No more guilt trips after shopping sprees or that tropical vacation, assuming you budgeted for it of course.
- Stop the (Debt) Bleeding – the debt spiral can quickly get out of control. From credit cards (with high interest rates) to student loans to car payments – the list of debts can really add up. Once you account for those payments in your budget, you can live more comfortably and confidently knowing you have a game plan to tackle each debt liability. This is just one piece of your overall budget, so although it may be the priority, it can also be set up so you can continue living the life you wish to live while paying down that debt.
- Change the Conversation – money is one of the top reasons marriages end in divorce or families fight constantly. You have the opportunity to change that conversation and get ahead of this potential pitfall. Instead of waiting until it’s too late, have money conversations with your significant other or family members now. The key is consistency. As you develop a budget framework, schedule a standing meeting to review it, talk about how it went, identify areas that may need to be adjusted and discuss ideas on how you can keep it all on track. Each budget can be different and how you manage it depends on the individual and what motivates them. Perhaps you enjoy small celebrations for key wins, or you send motivational text messages to each other or you identify an accountability partner to check in with. How you get out in front of potential money problems is in your control, but it’s important to consistently and actively work on it.
- Have Fun – you have the power to make budgeting fun! It does not have to be a burden and a dreaded conversation; instead implement positive emotions around budgeting and the conversations that go along with it. The budgeting process is intended to set yourself up for success now and in the future. Although it can be hard to say no or painful to miss a financial goal, as long as you are always learning and growing, then your budget will pay off in the long run.
- Own Your Future – you are accountable for your own life and are the only person who has the control to achieve your financial freedom. Implementing a budget is one of the baseline tools you can implement to do this. From short-term to long-term goals, it will all be captured in your budget so you can proactively work toward achieving it. Whether it’s saving for a down payment on a dream home or saving up for your retirement goals, if you don’t start now, it could never happen.
As you can see, budgeting is a critical piece of managing your finances and setting yourself up for success. There are countless resources available to support you – whether you choose to use a simple Excel spreadsheet or envelope method (sticking cash into the appropriate envelope each month) or prefer a web-based or mobile app (such as Mint or Dollarbird), as long as you are tracking your expenses against your income, then you are budgeting.
Here are some of the key steps and information you should capture to get started:
- Write down your household total monthly income (after-tax, this includes your take-home pay) – includes your full-time job salary, plus any other income you have coming in from a second job or expected tips/commission
- Write down all of your expenses – it’s easiest to break these up into 2 categories: 1. your fixed expenses (these don’t change every month and can include items such as your rent/mortgage, electricity costs, phone bill, student loans, etc) and 2. your flexible spending (costs that can fluctuate each month and can include categories such as groceries, entertainment, gas, etc)
- Write down your financial goals – now list your short-term and long-term financial goals. These can include saving for a down payment, an upcoming vacation, a new car, etc. Begin earmarking money for these financial goals. Don’t forget an emergency savings fund and retirement if it doesn’t already come out of your employment paycheck.
- Subtract Expenses/Goals from your Income. This is your leftover money and can either be re-attributed to your ongoing expenses or you can apply it toward a future goal.
The above information and exercise will ensure you aren’t spending more than you earn, and are working toward your future financial goals while not sacrificing the present.
Financial management can be tricky and it is very easy to get off track if you aren’t actively managing it. By creating a budget today, you are taking the first steps to financial freedom.
“A budget doesn’t limit your freedom, it gives you freedom!” – Dave Ramsey
ISU Credit Union has a "Resouce Center" that provides buying tips for home, auto and insurance products. We also have a suite of calculators that can help with loans calcualtions, budgeting or really anytihing you need.