The start of the new year is a great time to assess your financial situation and create your yearly budget.
It’s surprising how many people run out of money before the end of the month, but can’t tell you how much money they spend on a monthly basis. Taking control of your financial situation requires a plan, or a budget, to understand where your money is coming from and how it’s being spent. Keeping track of where your money goes is necessary to finding areas in your spending which can be cut back to make the most of every dollar you receive, and for planning for specific financial goals.
Annual Budgets Help You Estimate A Monthly Budget
Starting with the creation of an annual personal budget gives you an accurate estimation for a monthly budget. With an annual budget, you can enter historical data for each of your spending categories based on receipts you’ve saved, or just estimations of what you pay per year. Looking at the annual budget allows you to see your irregular expenses and the months they occur in, as well, which makes it easier to plan for them. After setting up your annual budget, you can calculate a monthly average to enter into a monthly budget worksheet.
Budgets Help You Reach Financial Goals
Experts will tell you it’s impossible to accomplish a goal without having a plan in place. Your finances are no exception to the rule. Having a budget is the plan which allows you to reach your goal, whether you’re trying to save a certain amount of money or pay off debt.
Without a budget in place to help you, you may not make the best decisions for how to use money when you receive it. Once you have your spending habits on paper (or better yet, a budget spreadsheet!) you can see where there are holes in your finances, and reduce spending in one category in order to funnel money toward your financial goal.
Budgets Help You Identify Wasteful Spending
Most people are shocked to see how much money is spent over the course of a month on things they don’t even think about. For example, stopping on the way to work for coffee or a fast food breakfast may only cost $4 a few days a week, so it may not be something you give a second thought to. Maybe you spend $2 a day at the vending machine in the break room at work, or get lunch from the deli instead of bringing your own. Small purchases like these seem unsubstantial, until you see how much you pay for them over the course of a month, and then on an annual basis.
As you are creating your budget, take a look at these wasteful areas of spending and consider trimming them to funnel the money toward debt repayment or a savings account.
Budgets Help You Handle Unexpected Financial Situations
What would you do if you woke up and discovered you were going to be laid off, or receive a salary cut? Would you be able to survive on less income? When you are keeping an eye on your spending as you do with the budgeting process, you can make adjustments to how you spend money and have a good idea for what nonessential areas of spending you could reduce in order to pay for the essentials during a period of less income.
Budgets Help You Identify Surplus Money
A primary goal of creating a budget is to determine how much money you receive as income and how much you pay as expenses – to see how much you have left over. This process can be simplified by starting with a free Personal Budget spreadsheet or Budget Calculator from Vertex42.com. If after you’ve entered your information into the spreadsheet you discover you have money left over each month, you can then determine what the best use for that money is – rather than letting it get absorbed into your spending as it normally does for individuals operating without a budget in place.
Debbie Dragon is a financial writer and co-owner of reliablewriters.com. Dr. Wittwer is the owner of Vertex42.com and creates spreadsheet templates and financial calculators for Microsoft Excel, OpenOffice.org, and Google Docs.