Why do so many people manage their finances without using a budget? This is just an educated guess, but maybe it’s because most of us aren’t accountants. I’m not trying to ruffle any feathers here, but let’s face it, unless you have a mind for number crunching budgeting probably isn’t something that comes naturally for you.
Let’s first establish what budgeting is. Budgeting isn’t merely properly recording your spending, like recording payments and reconciling your bank accounts. That’s the kind of stuff we all have to do. Budgeting is tracking your spending habits so you know what they are and so that you can modify them in the future to help you get where you want to be financially.
Photo by bandita via Flickr.
The end goal of budgeting is to minimize spending, and maximize savings for investing and long term financial independence. That’s pretty much where we all want to be, isn’t it? But getting there is a mechanical process, and that’s the part where you might need some help.
Don’t kick yourself if you haven’t been into the budgeting thing up to this point. Fortunately, there are programs that can help you get to where you need to be. The first step is to choose the best money management software. And there are plenty of them out there now — Mint, Personal Capital, Mvelopes Personal — you name it.
Most of us are becoming more accustomed to managing our finances online, and good money management software is perfect for that. You can track your spending, deposits and transfers between multiple accounts and know what’s happening with your finances virtually as it happens. And you can do this from your laptop or smart phone so there’s no need to rely on paper statements anymore.
More important, you’ll be able to organize your spending into categories so you’ll know exactly where you’re spending — or overspending. It can all be neatly organized into spreadsheets and even supplemented with charts and graphs for visual effect. Once you know where you’re spending your money, really spending your money you’ll be in a position to make spending decisions by cutting expenses and even increasing savings. That’s what budgeting allows you to do.
Most people lose control of their finances precisely because they don’t truly know where the excess spending is. With money management software you’ll know — and you can do something about it.
Another tool that will help with budgeting is an online savings account. You’ll want to find the best online savings account and that can be a valuable addition to your money management software. There are many banks to choose from, but you’ll want to find one that offers the highest interest along with no monthly fees or minimum balance requirements.
Savings, in my opinion, is the underestimated element in the budgeting mix. Many people who don’t have a budget often don’t have a healthy savings account either. Savings — that is, pure savings — are critical to the budgeting process. Savings provide a source of funds in the event you have to go over your budget, but they’re also the end game of having a budget. The purpose of reducing expenses is to increase savings, and you have to have a good place to put the extra money. A savings account is just the place.
If your savings are automatically transferred from your checking account as a result of your budget, you’ll be taking them out of a place where they can be spent and giving yourself time to decide if the money should be held in savings or moved to an investment account.
What’s important is that the flow of your money, whether it’s for spending, savings or investments, is totally in your control. That’s what a budget can do for you.
However you decide to run your budget — whether using money management software or writing it on scrap paper — the important thing is to get started. You can begin with a simple pencil-and-paper budget, then as you grow in understanding you can move it all over to software.
Do you use a budget, or do you just wing-it with your finances?