Budgeting can go a long way towards saving money. Here's how it can help with your financial planning.
Learning how to budget is a life skill that’s always going to be important, especially when money is tight. Budgeting can help you save money, and every day that goes by without knowing how to budget is a day where you might have lost money that you didn’t need to.
Compare accounts to help you save
A budget is a way of sorting out how much money you have coming in, how much is going out and how you can balance these amounts to save. The amount that is going out needs to be less than the amount coming in, or you may find yourself bankrupt or in debt. If you are planning on having a baby, want to save up for a house, like to enjoy regular vacations or simply need a way to make ends meet, a budget can help. In today’s world of credit cards, finance and countless expenses it’s easy to lose track of how much you are spending. For good financial planning, budgeting is a necessity.
How can budgeting help?
Budgeting is something we should all be doing to stay in control of our finances. This is because having a budget brings a lot of clear benefits, including:
- Greater control: When you budget effectively, you can see exactly what is coming in and what you are paying out each week or month. This means that you can check at a glance whether you need to take action, or if everything is going well.
- Better prepared for last minute price hikes: Budgeting properly makes it easier to adapt your finances to different circumstances. For example, if you receive a notice to say that your energy bill is rising by $10 per month, you can look at your budget for a list of different places that extra $10 could come from.
- Increased visibility of your expenses: Sometimes the right choice is to simply cut back on spending. Budgeting can make this easier. You can check your list of expenses to see where you can cut back, or what you might be overspending on. If you have ongoing expenses that are causing a headache, like overpriced car insurance, it can stand out in your budget so that you can identify it and take action.
- Greater ability to find gaps and differences in your spending: A budget doesn’t just show you how much money you have or how much is being spent. Instead it actually puts your income and your expenses side-by-side so you can see what the difference is. This is important because it lets you see whether saving strategies are paying off, or whether ongoing expenses are costing too much.
Rebecca had just moved to a new city, but was having trouble finding a job because she lived far away and didn’t have a car. Without getting a job she was depending on a combination of her own savings and a small amount of money her parents were sending each week until she was able to find a job and get established. To make matters worse, she only had three more weeks to find a job before being deported.
Fortunately Rebecca knew how to budget effectively. She added up her total savings and marked down the money she was getting from her parents as dollars per week. After some consideration and research Rebecca also marked down a hypothetical loan for $2,000. Now that she had all the information, Rebecca could work out exactly how much she was able to spend on a car within the next three weeks and what kind of payment plan would work for her.
Finding a method that works for you
The only wrong way to do a budget is when it doesn’t work for you. The trick is to find a method you’re comfortable with and then learn how to use it effectively.
Pen, paper and calculator
There’s no reason to make it complicated, so if these are your preferred tools then consider sticking with them rather than using something new.
Quicker and more convenient than pen and paper, but only if you know how to use them. If you have a rudimentary knowledge of spreadsheet programs like Microsoft Excel, but aren’t keen on using budgeting software, then this might be the right option for you.
Budgeting software and websites
Microsoft Money, Quicken and many other budgeting programs are available for household use and there are a lot of useful websites that can help you manage your budget. If you want to be able to manage your budget over the phone, are saving up for a specific target or have more complicated incomes and expenses, then these programs might be the ideal way for you to budget.
While these methods differ from one another, they all let you clearly look at your income next to your expenses, which is the main purpose of a budget. Whenever you need to make a financial manoeuvre like cutting back on spending, or working out how you’ll manage a pay cut, a budget can help you see what it means in real terms and where it will leave your finances at the end of the month, before it’s too late.
Interest earned on a savings account can land in the income section of your budget, while fees spent on the account will land in the expenses section. For practice, you may want to try drawing up a simple budget with your current savings account, remembering to include both interest earned and money spent on fees, and then drawing up another with one of the savings accounts below to see how it might impact your finances at the end of each month. With a bit of practice you can do this with many purchases to see whether they’re right for you.