WHY SHOULD YOU CREATE A BUDGET?
People like to seek the thrills of life. They like to know what the “it” thing is and dive right in. Like people who smoke without fully understanding the risks of smoking, investing is no different. Most people like to jump right into investing their hard earned money without doing research before hand. When people think about making money usually the first thing that comes to mind is bankers and brokers on Wall Street. People hear stories of the quick hits of traders and think they can duplicate their wins. But what they don’t realize is they have training and experience in the financial markets.
Having a Budget is the Start to Success.
For the average person, you can’t just go in and start trading stocks without being aware of the risks or understanding personal finance. Before you start trading stocks you must develop a sound financial plan. A basic financial plan starts with a budget. A budget should begin with all sources of income. This would be income earned from working as well as interest earned on a savings account or a bond. But keep in mind that if you are projecting your budget a few months or a year in advance not to forget to deduct taxes. A basic budget typically tracks your finances over a month-long period.
The next thing you should do is track your expenses. Your expenses are anything that takes away from your savings. Basically expenses are things that cost you money. Things such as rent or a mortgage payment, utilities, gas, food, phone bill, insurance premiums and health premiums. Your expenses are anything you expect to send money on within a month.
For kids or teens, the expenses listed above may or may not be included in your budget. For example, you may not have to pay health insurance premiums because your parents pay that for your benefit. But if you routinely spend $30 at the movies, you may want to include that in your budget. Typical expenses for you may include, video games, shoes, hair cut, date night, ect.
This is an example of a basic budget in a pie graph. This pie graph shows expenses broken down into sections and expressed as percentages to show total amounts allocated to each category.
Keeping track of the budget improves your life.
By having a budget and sticking to it you will enhance your financial situation and hence, your life. If you know you make $50,000 a year, try and see what tax bracket you fall into and estimate how much is taken out of your paycheck. (Tax rate is 15% for married filing jointly)After taxes, $42,500 is what’s left or about $3,500 a month.
If you know you pay $1,000 in rent, $80 for water, $200 for food, $180 for utilities and another $500 in miscellaneous things you can see you spend about $2,000 a month. That leaves you with about $1,500 for saving in an emergency fund or use to put towards a trip you may be thinking about or paying off student loans if you still have an amount outstanding.
As you can see, having a budget can help you become a conscious consumer. Being aware of what you spend your money on as well as how much you spend can help you make cut backs in unessessary expenses. Please keep in mind that keeping a budget doesn’t have to mean living on less or having a less fulfilled life. Cutting back on expenses or things that may be more expensive will free up more income for other things that are more important, like eating out less to save and taking a trip to Europe. Learning to budget can lead to a successful and more adventurous life.