For many, the term “budget” is a dirty word that causes stress, pressure and unnecessary arguments. In fact, the very term has caused more domestic disputes and divorces than any other word in the English language(1). Not to mention, media and television sitcoms have degraded the “budgeting process” and say it can’t be taken seriously(1). It has reached the point where financial analysts and much of the financial community uses “cash-flow management” to refer to budgets and refrain from associating with the negative connotations.
Truth is, it doesn’t need to reach this level. Building a budget should be a useful tool that helps you move from where you are to where you want to be. Think of it as a treasure map leading you to your treasure (your goals or desires). A budget is your roadmap for taking control and making your money work for you.
Understanding Budgets
It’s no surprise that budgets are one of the most important aspects of financial success. Whether investing, saving or buying, budgeting is necessary for getting most of what we want in life. Budgets help us economize, save for what we want and manage how we will pay for the important things.
Every budget has two main components – cash coming in (inflows) and cash going out (outflows)(1). An inflow can refer to your income, savings and even money borrowed. The key with any budget is not spending more than you actually have. Subtract your outflows from your inflows to balance your budget and understand when you need to bring in more money.
Everyone has a Budget
Everyone has a budget whether they know it or not. But does everyone follow their budget? Of course not, but that’s not to say it doesn’t exist. Think back to your childhood allowance; let’s say you received $5 each month. Whether you spent that money right away or saved it, you made decisions based on that allotted amount. That $5 was your budget. As you got older, your budget most likely increased allowing for more decisions and more risk. This is where having a written, cash-flow management plan is beneficial to stay on track. However, for a budget to work, you need to put forth the effort.
A budget is simply a way to manage cash coming in and how we spend it. It can help plan for future spending, making investments, monitoring savings and making borrowing decisions. When you physically write down a budget, you have a better understanding of your finances. Don’t let the word “budget” stress you out. Build a budget, stick with it and get what you want in life. It can be as simple as that.
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