Why The Need For Making A Budget?
A budget provides a realistic view of your finances for a defined period of time. It gives a clear snapshot of your finances (revenue and expenditures) that encourages you to set financial goals and achieve certain financial targets. Moreover, it helps you to spend less and save more which is why having a sound budget is absolutely necessary for every household or commercial firm. Whether you make monthly or yearly budget, it requires your time, mental effort, and focused energy. Allocation of monthly paychecks throughout the year is no easy feat. Only a proper finance budget can serve you well which means you need to set your priorities in order to keep things going for you.
The Significance of Creating a Budget
Budgeting money is critically important for maintaining a healthy financial life cycle. People often consider creating a budget a mere burden on their shoulders as most don’t have the mental capacity to handle money-related stress. Creating a monthly budget helps you to track your spending habits which ultimately encourages you to spend less and save more for your future needs. Moreover, a budget helps you to prepare for emergencies and uncertainties, it leads to a happy retirement, it sheds light on awful spending habits, and, hence, it helps you to fulfill your dreams and desires.
According to studies, nearly 80% of Americans exceed their budget limits for the month. This indicates that creating a financial budget may be easy but following it strictly is pretty hard. Overspending is a bad habit which may lead to a future disaster. Therefore, creating a budget plan allows you to know your spending patterns as it reveals crucial insights that encourage and motivate you to save more for uncertain and unknown needs in the future.
Creating a balance between your expenses and income may be hard but there are ways in which they can be planned and handled well. You need to create monthly budgets throughout the year in order to ensure that you will always have money in reserves to buy things that are important to you.
Budget Forecasting and Planning
On the other hand, creating a yearly budget is quite different than making a monthly one. Most people use a traditional approach to making a yearly budget. What they do is simply add up their total income and expenses for the entire year and divide each category by 12 to know their monthly average. This approach may feel right but it has certain limitations and can never reveal the true picture of the story. In other words, monthly budgets serve basic needs and a yearly budget can enable you to achieve long-term financial goals.
Creating a budget for the year requires budget forecasting and planning. Almost everyone has to deal with tight finances, however, making the best use of resources is all that is needed. You need to look for ways that you can save money. Budget forecasting and planning are the secret tools that can assist you to spend less for the month and achieve certain financial goals and targets as intended. For example, when looking at your monthly revenue or income status, you can decide when you can buy a car, house, afford to repay debts, file taxes and deal with other similar important financial matters. It only requires simple bookkeeping to achieve a healthy, easy to follow budget.
Step By Step Guide In Making Your Own Yearly Budget
Gather Your Tools
Whether you are creating a monthly or yearly budget, you need to choose your own budgeting tool. This can either be done on a piece of paper using a calculator or on a spreadsheet such a Microsoft Excel. Moreover, you can also download a free budgeting software for creating a more accurate budget for the year. Click HERE to see some of our favorite apps for managing your money.
Collect Income and Spending Receipts
To know how much money you earn throughout the year and how much you spend, you need to collect your credit card statements, past bank statements, utility bills, paycheck stubs, canceled checks, and receipts then examine your monthly patterns to know your exact income and spending status. This will allow you to make better projections about the coming year.
Make Income and Expense Projections
You need to examine your expected annual income or revenues from all sources such as salaries, social security, interests, dividends, child support, bonuses, rents and royalties, retirement allowances, etc. Similarly, you need to figure out your expected annual expenses and make projections on where you are going to spend your monthly paychecks for the year such as expenses on food, utilities, transportation, clothing, home maintenance, medical expenses, debt repayments. etc. Making income and expense projections when creating monthly budgets is a lot easier than making projections for the entire year. Therefore, you need to be very careful in sorting things out!
Evaluate Your Cash Flow
By subtracting total expenses from total income, you will know whether your financial condition is favorable for you or not. If you have made a surplus, then you can plan to spend or invest it in a project. If you haven’t, then you need to change your spending habits.
Creating a monthly budget is a lot easier than creating a yearly one. When creating a yearly budget, look at the bigger picture for getting things right—the first time. You have to set your priorities and allocate resources optimally in order to achieve intended outcomes.
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