Living without a budget is similar to traveling across the country without a roadmap. While both can be accomplished, the result is usually expensive and wasteful. The household budget lists every anticipated expense in major categories that can be directly tied to actual expenditures.
Many people view the use of a budget as restraining and remedial, but most wealthy people have grown their financial wealth through the use of a strict budget. Budgeting activities provide substantial benefits to personal financial health because the budget:
Acts as a Roadmap
Creating a budget will reveal where every dollar is currently being spent. The visual representation of the actual expenditures reveals the direction followed. When the course being followed is incorrect, the budget can be used to re-route your plan. The budget is a living document that must be updated with the changes that occur in your life, such as getting married or adding a new baby to the family, both of which can increase household spending.
A detailed budget that is compared against the actual monthly expenditures will reveal money leaks. When money is spent on non-budgeted items, budget shortfalls are created and can be corrected. When you can identify a source of waste you can then take corrective action. Even better, you can reroute the money that’s being wasted towards other financial goals, such as building an emergency fund or saving for retirement.
Family discussions over the budget can reveal differences in priorities that may often cause conflict. Conversations to address the underlying priorities will correct the problems and reduce disagreements over money. Since money is such a stressful part of marriage, identifying discrepancies before they become an issue can do a lot of good. And again, it can help you find common ground for working towards major goals, like buying a home or paying off debt.
Builds New Habits
Efforts to stay within the budget will build new spending habits that can be maintained over time. Working within the budget will shift actual expenses from unnecessary categories into the most essential household categories. Money will be available for the most important expenses and debt reduction becomes possible. Once you get into the regular habit of budgeting, it’s easier to maintain and you can begin to see real progress from those positive habits.
Following the budget throughout the year gives everyone an accurate picture of the financial health of the family. Guesses are no longer required to determine if large purchases and vacations are affordable. When annual expenses are budgeted each month, sufficient funds will exist to pay the bill when it becomes due. That all adds up to less stress over money because you know exactly where each dollar and cent is going.
If spending exceeds budgeted amounts, corrections can be made in the coming months to control the monthly flow of money. When outstanding debt is weighing on the monthly finances, the budget can show areas where spending can be reduced to find the money to repay the debt.
Setting budget amounts allows every family member to provide input. If the family goal is to have an annual vacation, for example, simple reminders can be given in response to why money cannot be spent on other categories until enough money is saved for the vacation. The budget acts as a barometer for the family finances, as well as a motivator to work towards your goals.
Transforms Money Into a Tool
Budgeting all monthly expenditures can help change your mindset toward money. Instead of spending impulsively, you can learn to value money as a tool to reach goals and fulfill needs. And getting your kids involved in the budgeting process early on can help them learn the value of money, since they’re involved in some of the decisions necessary to establish the budget.
Debt repayment and living according to the budget will move the family toward living within the monthly income. As less money is spent, excess income becomes available and is considered financial margin. You can then decide where to apply that extra to create long-term financial security.
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