The Importance of a Solid Budget

  by Tyler Curtis

One of the most common deficiencies I find in people’s financial household is a solid budget. An outline of your expected monthly expenses, as compared to the income you expect to receive. This surprises me because of how important a budget is to your overall financial plan. I often find that people have a ballpark idea of what they spend, but when asked to identify exactly what they spend on specific goods and services, they very seldom can pinpoint these expenses. Today I will provide you with a budget outline and a way to get on track with your monthly cash flow.

A solid budget consists of a few key components, which every person should have a clear understanding on. The first is net income, which seems pretty straight forward. Take your gross income, reduce that by taxes and pre-tax retirement contributions that you make, and you are left with your net income. This is your take home pay each month.

Next we focus on expenses. These are broken into fixed expenses and discretionary expenses. Fixed expenses are the expenses that typically don’t change by much, and must be paid every single month. Examples of fixed expenses are your mortgage payments, auto loan payments, insurance payments, etc.

Discretionary expenses tend to fluctuate from month to month, and are a bit harder to narrow down to a dollar figure. These include things like general entertainment, restaurant spending, groceries, dry cleaning, etc. While these expenses definitely tend to fluctuate, we all should have a pretty good idea of what to budget for.

So now that the components of a budget are clear, how do you get started? The first step is to actually make an effort toward establishing a budget. If you are completely lost and don’t have a clue in regards to where you are spending money, can be a great resource. This free site will link with your financial accounts and categorize your spending for you. The site also allows you to set a budget for each category, and will send you email notification when you are getting close to exceeding that budget. This can be a great tool for identifying areas of your life where you may be spending more than you think.

If you are like me, you have a pretty good idea of where your money is going on a monthly basis. Once you have identified where your dollars are going, it’s important to set up a structured budget. I use excel and have everything broken out in detail on a monthly basis. I have provided an excel template for you to use, which can be downloaded by clicking here.

The real key to financial success is developing a solid budget and sticking to it. Start off with a ballpark budget and then adjust the numbers after analyzing what you actually spent during the prior month.

By creating a budget, you give yourself a much better chance at realizing financial success. I strongly encourage you to invest the small amount of time it takes to set a budget for yourself. You may be surprised by how much money you can save by simply identifying where your money is going each month.

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