Financial Poise
Personal Budget

How a Personal Budget Shapes Your Financial Future

How and Why to Use a Personal Budget

Would you like to have more control over your life? A personal budget can do that. Trying to get ahead of bills? You’ll benefit immensely from a personal budget.

A personal budget is a powerful tool. It’s a way to track income, understand and manage debts, build a buffer for unexpected expenses, and plan for your future. It’s one of the best ways to achieve financial stability, regardless of income level, because it allows you to see your immediate funds and your immediate needs at-a-glance.

Ever notice how some people get ahead of others, despite similar incomes, education, and backgrounds? It’s not luck that makes the difference — it’s informed financial planning. The choices you make about your money today play a critical role in determining what your future options will be.

Your financial decisions — both day-to-day and long-term — gain clarity and perspective when looked at through the lens of a budget. You’ll be able to see what’s feasible, what’s possible, and what’s probably not going to work.

An Investment in Your Emotional, Physical, and Financial Wellness

A budget can be much more than money management — it can be a mechanism that helps you reduce stress.

The American Psychological Association’s February 2022 study found that 65% of Americans are stressed about money and the economy, the highest recorded level since 2015. Financial stress can focus externally on how to pay bills or make needed purchases, for example, or it can focus internally on feelings of self-blame, guilt, and insufficiency.

Stress has a proven negative impact on our bodies. Taking steps to understand your financial situation through creating a budget is a key step toward financial wellness and physical wellness.

Financial wellness, according to the Consumer Financial Protection Bureau, consists of four main points:

  • Have control over day-to-day, month-to-month finances
  • Have the capacity to absorb a financial shock
  • Stay on track to meet your financial goals
  • Have the financial freedom to make the choices that allow you to enjoy life

Why a Budget Still Matters

Automated transactions, like direct deposit, automatic withdrawals, automatic transfers, and preauthorized payments, can be helpful but also work against you.

When a transaction is automated, it’s easy to miss things like fraud, increasing credit card balances, nearing or reaching credit limits, unauthorized charges, or miscellaneous charges.

While making savings automatic can be life-changing, it could be that you need to save more to reach your goals. Automation can be a terrific tool to use once you have a budget, but using it without a budget can get you into trouble.

Creating Your Budget

First, build a clear snapshot of your income and your expenses.

Seeing your cash flow helps identify which areas you’re spending too much money on. You’ll quickly see what you must spend money on, what’s optional, and what needs to wait.

You can create a budget in a spreadsheet or use budgeting software. This downloadable budget worksheet is an example. The tools aren’t as important as the commitment.

You’ll revise your budget often as you become more familiar with the process and aware of expenses you hadn’t originally included. Make a habit of reviewing credit, debit, and banking accounts regularly to help uncover recurring expenses you may have forgotten.

Week-by-Week Tracking

Set up your budget and track everything weekly. Review your income, expenses, and available cash each week so that you see where your money is going.

Set spending limits for yourself. Make sure your spending is within the limits of your income. Plan for how you want to spend your money. A popular approach is to think about it as if you were giving each dollar a job. Available cash isn’t just laying around, doing nothing; it’s cash that’s working to pay utilities, buy new shoes, or get sacked away for retirement.

Look ahead and begin saving for larger upcoming financial obligations like property tax or quarterly income tax payments. Invest in your future retirement or start saving for that new business you hope to launch.

Good Habits Are Powerful

Find a way to make working on your budget a habit.

Stacking habits is the best way to be successful, according to B.J. Fogg, a behavior scientist at Harvard University. The Fogg Behavior Model says that three things have to happen for something new to become a habit: motivation, ability, and a prompt. Use a prompt — like having a cup of coffee at 3 pm every afternoon, and stack working on your budget with your coffee so that one behavior leads to the next.

Staying on top of your budget is one of the best ways to build your financial wellness. Financial surprises are much less likely to happen, and if they do, you’ll be better prepared to meet them.

It’s Human to Be Human

Seeing your financial picture for the first time may be a very emotional experience. Money often comes with emotional baggage and big feelings — it’s entwined with many, if not most, of the most important events in our life, like getting an apartment, traveling, having a child, or planning for early retirement. ‘How am I going to pay for this’ is a question that, while necessary, can lead to feeling inadequate, anxious, and depressed.

It’s okay to feel uncomfortable putting your budget together and getting familiar with your financial picture. It may not be fun to confront debt or see that it’s your low income causing pinch points. Problems will only get worse if you ignore them, so be brave, have faith in yourself, and face them head-on.

Smart People and Financial Plan for the Unexpected

Things happen that are impossible to plan or budget. Cars break, water heaters leak, cats get sick, emergency dental work is needed, layoffs happen — and you’re going to need access to money, fast, to take care of any one of them.

Data from the JP Morgan Chase Institute found that most people can weather significant financial stress with an emergency fund equal to about 14% of their annual income after taxes. For a middle-income family, that works out to be about $4,800. While that can seem like a lot of money to save, it’s much less than the 6-8 month savings cushion that conventional financial advice suggests everyone needs.

Your emergency savings fund needs to stay easily accessible rather than tied up in something you need to wait to access. Think of it as being available only for an emergency — a financial lifeline to pull yourself out of trouble.

Automate savings each pay period and watch your invaluable emergency savings fund grow.

A Strategy: Pay Yourself First

Paying yourself first is a strong financial strategy. You set aside a portion of your income for savings or investment before paying your bills or making any other expenditures. By prioritizing your own financial well-being, you build a stronger foundation for your future and are prepared for unexpected expenses or changes in your financial situation.

There are several reasons why paying yourself first can be beneficial:

  • You can build a habit of saving. By making saving a priority, you’ll create a habit of setting aside funds for the future. This habit builds a strong financial foundation, making it easier to save for long-term goals like retirement or a down payment on a home.
  • Improve your financial stability. By paying yourself first, you’ll build an emergency fund. A cushion of savings can give you peace of mind and make it easier to weather financial storms.
  • You’ll reach your financial goals faster. This is an effective way to build your wealth over time and reach your financial goals more quickly. For example, if you’re saving for retirement, paying yourself first ensures you’ll accumulate money consistently.

To implement the strategy of paying yourself first, you can set up automatic transfers from your checking account to a savings or investment account, or you can make a conscious effort to set aside a specific amount of money each time you receive a paycheck. The key is to make saving a priority and to do it consistently over time.

Long-term Planning

Assuming you have enough money in savings for emergencies and expected expenses, you should consider investing in longer-term assets. The smartest way to do this is to invest as much as possible for your retirement. For most Americans, this will be through a 401(k) or an IRA.

Contributions to a 401(k) or IRA may be tax-deductible, which can lower your taxable income and save you money on your taxes. Both 401(k)s and IRAs offer the potential for tax-deferred growth, meaning your money grows without being taxed until you withdraw it in retirement. This effectively builds wealth.

Additionally, some employers offer matching contributions to their employees’ 401(k) accounts, which can be a valuable source of additional savings. Both 401(k)s and IRAs allow you to set up automatic contributions, and that makes it easier to reach your financial goals. It’s a great way to pay yourself first. Be aware that both types of savings have required minimum distributions (RMDs), which means that you must start withdrawing money at a certain age (currently 72). This can help ensure that you do not outlive your savings. It is important to consider the specific terms and rules of these accounts before deciding whether they are right for you.

Budgets Can Be Challenging

It can be hard to budget effectively if your income swings widely up and down or when big, unexpected expenses occur more than once in a while. Getting laid off or having your work hours cut can have challenging consequences, especially if you’re working within a narrow cash flow window.

It can feel emotionally validating to buy yourself something during stressful times, treat yourself during happy times, or spend because others around you are spending. But if you’re budgeting and tracking your patterns and habits, You’ll quickly catch on to negative behaviors so you can make adjustments.

Imagine how much harder it would be to meet financial challenges without a clear understanding of your financial situation.

Decide to Drive Your Own Financial Bus

Start your financial budget with the expectation that it’s not going to be perfect. You’ll probably uncover some surprises, and it’s going to take work to set your budget up and maintain it. But remember that the smallest and largest of successful companies make budget control a priority. You might be surprised at how many very wealthy people depend upon a well-crafted budget.

Once you’ve got your first budget working, explore whether other layouts, software, or apps might suit your needs even better. Discovering your budgeting method and style can be fun.

Find another habit to stack a weekly budget work session with so that it’s more likely you’ll stick with the process.

Don’t stop there. Consider learning more about your financial well-being. The Consumer Financial Protection Bureau offers complimentary evaluation tools so that you can begin to look at your bigger financial picture.

Where do you want to go now that you’re driving your own financial bus?

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©2022. DailyDACTM, LLC d/b/a/ Financial PoiseTM. This article is subject to the disclaimers found here.

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