What Does Budgeting Mean?
To keep it very simple, a Budget is: an estimate of income and expenditure for a set period of time. Or “keeping within the household budget.” Many people cringe when they hear the word budget, and instantly assume it is a gloomy, painful process of giving up all the joy in their lives! So, what does budgeting mean to you?
Since the word budget has such a bad rap, let’s make a change and call it “proactive money management” or a forecast. A forecast is a general vision of what’s to come; it allows us to make decisions for the next few days, and for the month. We all know that the weatherman isn’t always exactly right, often changing the outlook as the clouds roll in faster or the sun bumps up the temperature.
When you forecast how you want to spend and save your money, you are pushing out your projection for the next week, month, 1-year plan and beyond. Just like a weather forecaster evaluates new information to share with viewers, you may have to adjust your financial timetable as “life” happens.
Be Honest and Accurate
To accurately predict the weather, you must set the destination. Knowing the temperature in Seattle has no meaning if you live in Miami. With your finances, you need to know where you are; how much you bring home and what your monthly expenses are. Creating an estimate of how you want to direct or point your extra money into different funnels establishes a roadmap for the plans or goals you set for the future.
If you are like 90% of Americans, you tend to inflate your salary and round down your bills. Try to flip that assessment around. By underestimating your take-home pay and then basing your monthly bills at the highest projected amount, you have now given yourself a cushion of cash reserves. That’s refreshing!
Inflow and Outflow
A budget doesn’t always mean cutting costs; it is merely a plan for how your money will flow into your life and then dispersed to others for the benefits you want. Most people apply their money to three main priorities: food, housing, and transportation. These are essential components for a higher quality of life, and once you have these taken care of, you can begin to set aside money for other important goals or dreams.
Write down every expense, good or bad. Don’t pretend that you always spend money wisely. We all have habits and plenty of opportunities to be wasteful with our dollars.
Don’t Judge It. Put It In Your Budget
One of the most important steps you can take in understanding your relationship with money is to become aware of where you are at financially. What is the amount of money coming in versus what is going out.
We have created a simple Honest Budget where you can be up front with yourself about all the little expenses you don’t want to dislose. Are you spending 30% of your income on habitual things that leave your wallet empty?
“Don’t judge it. Put It in your budget!” – Bob Wheeler
If you discover there is not enough money for the three essentials of housing, food and transportation, then you must explore your options to find a reasonable balance. You could cut down on one of these components, (smaller apartment or using coupons for groceries) or you could ask for a raise, look for another job or add a second job on the weekends.
Creating a forecast (or budget) of what bills need to be paid each month, along with one time expenses that come up each year –– gives you a good guesstimate of where your cash flows in and out. A lot of people arrange to get monthly insurance bills instead of one massive bill annually, and this makes it easier to stay on track and “In-Budget.”
Work your desires into your budget. Save for special events and big purchases. Once you have identified where your money comes in and how you want to spend it, you have the power to change your plans. You have opened a new door of opportunity with intentional, proactive choices. The benefits of forecasting your money flow include less financial stress, a new sense of understanding of what’s important and the freedom to choose how you spend your money!
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If you liked this post, check out our Ultimate Guide to Financial Freedom. You can learn that there are so many aspect to why we do what we do with our money.