An emergency fund can help you weather life’s unexpected costs while maintaining your financial health.
Budgeting: Building a Plan for Your Finances
“A fool and his money are soon parted.”
This phrase, which has been around for centuries, means that if you’re not careful, you can end up spending money in foolish ways. Planning is important. In fact, many people put together a financial plan but don’t follow through on it. There are things you can do to help prevent you from spending your money in unplanned ways.
“We understand that some people would rather get a root canal than budget,” said Joe Correnti, senior vice president of brokerage product at Scottrade. “However, it can spare you a lot of financial headaches in the future.”
The Importance of Budgeting
Think of yourself as a business of one (or however many people are in your household). Any well-run business needs to budget expenses and income to help it assess ongoing and future financial needs.
However, we don’t always do the same when it comes to our own finances. A 2013 survey by Gallup found that only 1 in 3 Americans prepares a detailed budget each month.
If you are one of the 2 in 3 who don’t budget, there are several good reasons to start:
- Allows you to set your spending priorities.
- Keeps you from spending more than you earn (hello, credit card debt).
- Gives you a clear picture for savings – whether for retirement or your dream African safari.
- Allows you to project financial needs in the future.
Take Stock of Your Priorities
Maybe you checked your budget and found that you’re spending more than you’re bringing in. Or maybe you’re spending too much money in one area that’s leaving less room for others.
If either situation pertains to you, it’s time to take a hard look at your finances and perhaps reprioritize where your money is going.
“Let’s say it’s a major priority for you to increase your retirement savings, but now you find that you’re eating out 4 nights a week,” Correnti said. “Unless eating out is more of a priority than retirement savings, you should probably reallocate those restaurant expenses.”
Focus on Income, Not Just Expenses
A good budget doesn’t just lay out all expenses. It can also tell you whether your income is aligned with your expenses.
So pay just as close attention to the revenue side of your budget as you would your expenses. If you find yourself in a financial hole, you might need to consider reviewing opportunities to increase your income, if possible.
Get into a Rhythm
How you budget can depend on both the complexity of your finances as well as your personal situation.
Many people have taken advantage of using a host of mobile apps to help them better manage their money. Some turn to a spreadsheet. And others prefer a more old-fashioned approach with pen and paper.
But regardless of the tactics you use, a budget doesn’t do any good unless you’re making a concerted effort to follow it. If you consistently check up on your budget, it will help you stay on target.
“Set specific times – such as every week or every month – when you’re going to check up on your budget,” Correnti said. “If your budget is off track, especially over a period of time, it’s time to reevaluate your finances.”
Read Next: Compounding: How Savings and Time Can Add Up
The content provided is for informational and/or educational purposes only. The information presented or discussed is not, and should not be considered, a recommendation or an offer of, or solicitation of an offer by, Scottrade or its affiliates to buy, sell or hold any security or other financial product, or an endorsement or affirmation of any specific investment strategy. You are fully responsible for your investment decisions. Your choice to engage in a particular investment or investment strategy should be based solely on your own research and evaluation of the risks involved, your financial circumstances, and your investment objectives. Scottrade, Inc. and its affiliates are not offering or providing, and will not offer or provide, any advice, opinion or recommendation of the suitability, value or profitability of any particular investment or investment strategy.
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