One of the most difficult challenges of implementing a financial plan is budgeting. This is due to the fact that most of us live busy lives and just can't find the time to track every financial transaction. I once thought that household budgeting software would make it easier to stay on track, however I was wrong.
Despite the fact that budgeting software gathers, stores and analyzes financial data, our financial situations barely improve when we use these hi-tech solutions. This highlights a critical financial planning concept; most of the time our financial situations will only improve when we decide to change our lifestyles. Budgeting helps and enables us to make these sometimes necessary changes.
The Benefits of a Household Budget
Many people compare budgeting to going on a diet. I agree with this comparison, however not for the obvious reason. Budgeting helps you improve your financial situation by determining what actions you will need to take in-order to reach your goals and objectives. This is like dieting, however instead of shedding pounds and building lean muscle mass, you are increasing your wealth by monitoring your income and expenses.
In addition to helping you accomplish your goals and objectives, household budgets also...
Help You Stay On Track - Effective household budgeting establishes a clear path for you to follow. On the occasion that you get off track, your budget will show you what you have to do to get back on your desired path.
Provide Important Information - When built correctly, a budget will forecast an individual’s income and expenses over time. This information enables an effective feedback loop that can be used to monitor and tweak a financial plan.
Reminds You of Your Success - Analyzing your budget overtime, will show you how far you have come since implementing your financial plan. In the best case scenario, each year you will watch your savings, investments and net worth grow.
Get Started Creating a Budget
At the core of a household budget is a financial planning statement called the statement of cash flows. This document displays and calculates all of the income (cash inflows) and expenses (cash outflows) of an individual, family or business.
In-order to begin drafting your budget you need to gather your financial data. Once you have all of the documents that show your income and expenses overtime, you can start to define your baseline. Your financial baseline is what you have earned and spent in the past.
Once you understand what you spend your money on, you can decide to change your lifestyle and purchasing behavior in the attempt to achieve your goals and objectives. This is what building a household budget is all about.
Creating and sticking to a household budget is not easy, however it is one of the best things that you can do to help increase your financial independence. You can create a budget by gathering your financial data, creating a statement of cash flows then forecasting what your income and expenses will be in the future.