The Advantages of Budgeting

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The Advantages of Budgeting

Published by sam - 16/08/07 - 12:08:04 am

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Who wants to budget? maybe no one. For nonbudgeters, the term often evokes feelings of anxierty and feat about the constraints of limited financial resources. But those who do maintain the discipline of a budget understand well its benefits. Says one reader responding to a survey of 1,200 Consumer Reports subscribers, “For a small investment in time, you get a feeling of control and no surprises, and you save a significant number of dollars”. Another reader adds ,”I have used a budget and accounting system for the past 38 years. I begain it at a time when expenditures seemed to be getting out of hand, and it has enabled me to retire with considerable savings.”

A budget is a plan for spending and saving money. The major reason for making a budjet and sticking to it is to save for future goals while meeting present ones. The budget itself serves a number of useful functions in money management.

Planning
A budget provides a plan that ensures that your total income meets your total expenditures. It also helps you to manage cash so that the timing of income nad expenditures matches. If cash-flow problems are likely to occur, a good budget can anticipate them and allow you to prepare necessary adjustments, either by postponing expenditures, obtaining sooner (if possible), or using credit to smooth out the cycle.

Althou a budget is a plan, budgeting must be distinguished from long-term financial planning. With financial planning, major long-term decisions are made for several years or even a lifetime. With a budget, you look at the immediate future-usually a month, six months, or a year - and decide how these long-term plans will be refined and implemented. Without abudget, its unlikely you’ll meet the goals set in financial planning, because immediate resources are rarely adequate to meet competing demans.

Communication
A budget is a concrete express of monetary plans and a device for codifying and communicating the details of thise plans. A budget communicates many kinds of information, from amoutns to be spent on utilities, transporation, and restaurant to savings for future education.

Motivation
A budget can help motivate you to reach your goals by creating realistic objectives and showing how they will be achieved.

Control
A budget can help you control your finances because it enables you to measure actual performance againts planned performance. Analysis of the differences between planned and real resutls can reveal areas of weakness that need attention, opportunities to save money not foreseen in the initial budgeting process, or unrealistic planning in the original budget.

Evaluation
At the end of a budget period, you can compare actual and budgeted results to evaluatre your overall performance in meeting your goals.

Self-education
Budget show how money is spent and how it might be spent.

Although budgeting can tell us much about our spending and earning habits, a significant number of people do not budget. According to one psychologist who has studied the financial attitudes of 12,000 American for twenty-years, only 60 percent of those surveyed kept budgets. A Consumer Reports survey of its readers showed better performance. Of those with annual incomes below $30,000, 82 percent budgeted; of those with income above $50,000, 64 percent did. Studies suggest that people beging budgeting because they are forced to do so by any several major life changes that make financial organization necessary for survival. That same psychologist reports that the most common reasons people start a budget are the birth of a child and a move to a new home. The next three catalytic events are a major expense, divorce, and retirement.

Another reason people beging to budget is to rectify financial problems caused by overspending or abusing credit. In our consumer-driven economy, constant media message to spend, spend and spend -coupled wiht pressure to keep up wi the Joneses-tempt us to spend more that we have planned.

Easy credit, although a boon fo rpurchasing large-ticket items and managing financial emergencies, can play havoc with a budget. About 10 percent of consumers overextend routinely. Credit experts suggest that if you spend more than 20 percent of your salary, not including mortgages, on credit purchases before your paycheck arrives, its unlikely you’ll have any discretionay income to budget. Once a family or an individual recognizes that overspending and credit abuse impede financial success, a budget can become the key to a financial turnaround.

Analyzing your expenditures is simply a matter of assigning spending categories or “accounts” for each check written over a period of time and then totalling the checks for each category as explained later. The appropriate category for each cehck is usually self-evident (phone bill, mortgages payment, alimony) unless the check was written to pay a credit card bill. In that case you would need to use the statement to assign charges to accoutns that month, whether or not you paid in full.
Whatever the immediate motivation-whether the contemplation of a more ordered financial life or relief from overspending-the decision to begin budgeting is only the start. Next comes the difficult work, which, if carried out with persistence, will provide the desired rewards.

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August 16, 2007 | Budgeting, Money Management |

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