BUDGET:

1.    An estimate, often itemized, of expected income and expense for a given period in the future.

2.    A plan of operations based on such an estimate.

3.    An itemized allotment of funds, time, etc., for a given period.

4.    The total sum of money set aside or needed for a purpose: the construction budget.

5.    A limited stock or supply of something: his budget of goodwill.

This is the definition I found for the word "Budget". 

Read the definition again and, maybe, even a third time. As I did this, it struck me that the total reason for a budget is so simple yet so often ignored. 

Why? Because it takes too much time to set up; because we don't like to see our finances set out in black and white; because sticking to a budget is so constricting; because budgeting causes us to "do without" things until there is money available to fulfill our "wants" and not our "needs". There must be other reasons to not have or stick to a budget; but, the ones listed above and any others you might think of are all bad reasons. 

Let's focus on some good reasons why having a budget is so vital to building solid financial habits. It may change our perception of following a budget completely and, maybe, even convince some of us to get busy working on a budget plan.

Preparing (and sticking to) a budget is an essential component of responsible money management.

Whether you just have a few bills, or you're responsible for paying all of your household expenses, understanding how much money you have and knowing where your money is spent is the first step toward achieving financial independence. Preparing and sticking to a budget becomes a way of life; a habit just like brushing your teeth. It's something you do almost automatically without a lot of thought as to why. 

When you travel, you wouldn't set out blindly. You would want to know the best route to get to your destination, the time it takes to get there and the number of miles you will be traveling. How do you arrive at all this information? By plotting your route on a map and following that route with few, if any, detours. 

If you think of a budget in the same sense, you are well on your way to building a solid financial future.  

A budget is your financial roadmap that will eventually take you to where you want to be - maybe it's saving for a new home or a new vehicle; maybe it's learning to save money on a regular basis; maybe it's a tool to keep you on track of your finances. Your budget is the foundation for good financial habits that will help you avoid the problems and pitfalls that will probably arise without a structured plan.

Getting started setting up a budget is probably the most difficult part of the whole thing. 

Start with keeping track of where your money is being spent. Take your last few bank statements, credit card statements, pay stubs and any receipts you may have for one month. The idea is to get a really good idea of your monthly expenses, savings and take-home pay. Then you can begin to fill in the holes by estimating how much money you spend on discretionary items such as food, clothing and entertainment.

If you are very fortunate, after you've adding up your expenses and subtracted the sum from your monthly take-home pay - you'll have some money left over. Good news! This is money that you can begin to save or invest.

If you're like many people however, you'll begin to understand why you can never quite make ends meet. Don't despair! Before you can solve a problem you first need to recognize it, and that is precisely what you've done in making your budget.

Now you need to begin strategizing about how you can get your financial situation on the right track. 

  • You may need to cut expenses like having a cell phone package with fewer minutes if you aren't using up all the ones on your current plan.
  • You may need to think of ways to increase your income - a second job, selling on EBay, tutoring, babysitting, turning your hobby into a business, making adjustments to your withholding taxes so that your net pay is increased?
  • You may need to find a way to manage your debt more effectively. For instance, if you get paid biweekly, take the "extra" paychecks you receive on months that have five Fridays and apply them towards your debt payments.

Evaluating your spending habits by developing a budget makes you think about your relationship with money. Like any relationship, to grow healthy and strong you must tend to it diligently. The basis of your money relationship starts with a budget, and with proper care, develops into financial well-being.

If you aren't convinced that a budget is good for your financial health, I will leave you with something that has stuck with me since a high school Economics class (do they still teach that?):

Did you know? You will never achieve financial independence if your spend all your money.

 Kimberly Johns, Debt Management Plan Customer with Leading Provider of Debt Relief, CareOne Services, Inc. Kimberly Johns

Kimberly is enrolled on the CareOne Debt Management Plan (DMP). Kimberly is very active in the Community Forums, some of you may recognize her Community user name; Tiquie. Recently retired, Kim shares how she and her husband manage the financial challenges of living on a fixed income in their home state of Illinois. The John's have found some really creative and fun ways to offset the limitations of a retirement income. Kimberly generously shares smart and tested tips in her A Straight Talk on Debt blog! Compensated Blogger for CareOne Debt Relief Services.