The Importance of Budgeting

A budget is necessary for successful financial planning. The common financial problems of overusing credit, lacking a regular savings program, and failing to ensure future financial security can be minimized through budgeting. The main purposes of a budget are to help you:

• Live within your income.
• Spend your money wisely.
• Reach your financial goals.
• Prepare for financial emergencies.
• Develop wise financial management habits

The Budgeting Process
In order to make and keep a budget, you'll have to put in some time and effort, but in the long run it will be worth it. The most common budgeting mistakes people make are failing to save, never making a budget, underestimating expenses, and not planning for large costs (vacations, auto repairs, etc.). The cause of these problems is people believe creating a budget is just too difficult or they don't have enough time. To make it easier, you can break it down into steps:

1. Set Financial Goals
   I've said this before, and I'll say it again because it's important. You must set financial goals for yourself. Goals can help you build long-term wealth, and not having any can lead to financial disaster. Your goals should be specific, realistic, and have a definite time frame.
2. Estimate Your Income
   This one should be easy. Just add up all the income you get in an average month, and use that to start planning your finances. Be sure not to include any income that isn't guaranteed, like gifts, bonuses, and overtime pay. Budgeting income may be difficult if your earnings vary by season or are irregular. In these cases, try to estimate your income based on last year and on your expectations for the current year. Estimating your income on the low side will he;p you avoid overspending and other financial difficulties.
3. Budget for an Emergency Saving Fund
   Dave Ramsey says this a lot, and it's good advice. Everyone should have at least $1,000 in an emergency fund in case something completely random happens (your car breaking down, surprise hospital bills, your roof collapsing). Obviously, the bigger the emergency fund, the better. The size of your fund will be largely determined by your lifestyle and employment stability. The ideal emergency fund will be large enough to support you for about 3 to 6 months of no income.
4. Budget Fixed Expenses
   Pretty self-explanatory, but theses should be listed first because they rarely change. Things like a mortgage, auto loan, insurance payments are fixed expenses. Unfortunately, they're the hardest to bring down.
5. Budget Variable Expenses
   Another self-explanatory one. These expenses are harder to budget for because they fluctuate, or vary (see the correlation there?), often. Budgeting high for these costs is often a good idea. If you don't spend as much as predicted, you'll have money left over to put into other areas of the budget.
6. Record Spending Amounts
   Make sure you keep track of how much you spend on certain items so you can compare your actual spending to the amount in your budget. If you overspend, don't sweat it. When people overspend, they feel like they failed and end up stopping making budgets altogether. Just accept that you spent over your expectations, and try to do better next month.
7. Review Spending and Saving Patterns
   Budgeting is a circular, on-going process. You will need to review you budget periodically and perhaps revise it if your spending habits have changed.

Microsoft Excel (or Numbers on a Mac) is an invaluable tool for budgeting and financial planning. It can simplify the process, and make analysis a breeze.