Budgeting

Where does the money go? How can you plan your own financial future? What is your current financial status? Answering those questions can help you put your financial life under your control, but it will take time and patience. It all starts with understanding your fate is up to you.

A good budget is goal oriented. A budget is a specific action plan that gets you from where you are now, to where you want to be in the future. A budget is one of many personal finance tools to help you reach your personal financial goals. It is only as complicated or time-consuming as you need it to be.

No matter how much your income is and expenses are, the same equation applies to everyone. All of us keep what is left over after subtracting expenses from income.

If you keep adding to a goal, you will eventually reach that goal. Sometimes life events will interfere and you will have a discrepancy. That is called a budget variance. That is ok. Simply use the facts at hand to make the best plan you can create with the resources you have available going forward.

Most budgets will have variances over time. It is useful to keep track of budget variances. If your monthly variances are consistently one-sided, there is something wrong with the budget. If that happens, simply make some changes either to your income, spending, or the plan itself. On the other hand, if your variances average out, then your budget is a good solid plan.

All budgets are plans but there are probably as many variations as there are people creating budgets.

In its classic form you could start with your income on the top line, then list and subtract expenses that are actual needs, which are must have items. Following those lines, list and subtract monthly targets to accomplish any mandatory goals. At that point, you have what is called discretionary income remaining; this is where you subtract any secondary goals, and any wants, which are nice to have items.

A more primitive, but still effective, budget is simply to label and put cash in the envelopes. When the cash is gone, you do without, while any left overs go to savings and investment accounts. This is effective for not over spending. It requires no paperwork, but money in envelopes can be stolen, lost, or consumed in a fire. It also tends to put saving and investing last.

The most goal oriented budget is what I call the self-activating budget. Goals are set in advance in a budget. But, this budget takes no chances. Goals are set and then arrangements are made to sock money away automatically towards the goals first. It could be automatic check deductions or automatic bank transfers from checking to savings. You live on what is left. You don't need monthly accounting for expenses because you know your goals are already satisfied. If income or expenses make a long-term change, a new plan is required, otherwise there is no need to review the plan since all that can be done is already being done. Obviously, there will be variances, all budgets have them. But, the intent is to account for variances by doing everything possible to make do with what is left over, while only resorting to altering goals as a last resort.

It is important to be honest with yourself for any budget. Cheating only undermines your own performance. Once an accurate budget is created, you'll begin to have more control over your own life. You are the only one who can decide what changes, if any, are to be made. The important thing is you'll be making conscious decisions about your life from the instant you begin to plan.

Making a budget might be a big change. If you plan, you are more likely to you can have money in the bank with some money invested to grow on your behalf. Saving, investing, and personal finance means more freedom for you, and doing a good job of a budget makes it less likely you'll ever be at the mercy of others. Isn't that worth some effort?

A budget is a proven personal finance tool; it is one of many steps in getting to a better point in financial life. It all starts with understanding your fate is up to you.