One of the simplest ways to avoid financial problems is to create a budget or cash flow plan, which is nothing more than mapping out your financial activities before they occur. It makes no difference if you make $30,000 or $300,000 a year. Putting the information on paper or spreadsheet allows you to see the limits of your money and helps you to manage it better.
The purpose of a budget
Budgets are financial tracking tools. Without one, the task of managing your money intelligently gets difficult. In other words, the effective use of money CANNOT be done in the head. Income and expenses must be written down where they can be eyeballed, planned, and tracked for meaningful outcomes.
The most important feature of the budget is its visual aspect. It allows you to see the totality of your income before it gets spent. Equally important is the act of forecasting or planning your expenditures before they happen. That way, YOU retain control of the inflow as well as the outflow of your money.
Your budget or Cash Flow Plan
These days, there are numerous financial software programs available to help you with money management. Some are more complicated than others. But all you need is a simple spreadsheet, like the one in this article, that can be manipulated regularly, based on your financial circumstances.
As mentioned earlier, with this tool, you can eyeball what’s happening with your finances each month. You will see the size of your income and how far it will reach, given the conditions of your financial affairs. Also, you will be able to make necessary changes along the way that will help with achieving your financial goals.
Notice that the tool provides a dedicated category called “Savings.” Allocating some of your income to this section, regardless of how little, is crucial for your financial progress. Without it, you will simply be working to survive, receiving an income, and watching all of it disappear into thin air. A monthly habit of this behavior will keep you broke for life.
Feel free to download this spreadsheet if you would like (Your Cash Flow Plan). If you must change it or build your own, I would like to suggest the following:
- Build your cash flow plan (budget) with twelve consecutive months and update the model each year.
- Build a model that will suit your personality—something that will work for you. As indicated, the attached model is only a sample of what’s possible.
- Keep things simple. Many of the software programs that are currently available for money management are too complicated for most people. When things are too difficult to use, we tend to get discouraged and walk away from them altogether.
- Your income section may include more than one source of income, which would be even better. That way, you can identify your income sources and forecast how long they will last. Knowing this in advance will give you some time to make changes when necessary.
- Your income and expenses may fluctuate slightly each month, which is quite normal in just about every household. The important thing is to have a steady flow of income to cover monthly expenses.
- Once you build your model, you should use it. Twice a month is a good frequency. That’s how often I use mine.
- You may create additional columns in the model for personal notes.
- Finally, have fun with the tool. Though it’s simple, it will help you achieve your financial goals.
Starting today, decide to bring this financially rewarding tool into your life. It will help you save a lot of money, stay within your spending limits, and keep you in control of your finances until money is no longer a concern because you have so much of it. By then, you should have a complete accounting system in place to track and safeguard all your wealth.
The budget has limits
With all the benefits of the budget, it has its limitations. Realistically, numbers on paper like the model above are only half of the discipline necessary for good financial management.
The other vital component is the human factor—YOU. As you shop, you need to restrain your desire to prevent impulse buying. This means that you must exercise control by staying within the allotted portion that you set aside for clothing, food, entertainment, etc. Consistently spending more than the limits you establish on the budget will cancel the effectiveness of the tool, rendering it useless.
Meanwhile, you will become frustrated, wondering why you’re not making financial headway as you expected.
The solution is to establish your spending boundaries and operate your household affairs within the allowable guidelines. When you do, the result will be positively surprising.
To learn more about the value of a budget and other money management concepts, consider reading my new book: Pennies to Power: How to Use Your 20’s to Gain Financial Independence for Life.
Thanks for reading.
What are your thoughts?
Have you used a budget? What are some of the difficulties that people run into when they attempt to use the tool? Can you personally overcome these issues? How?