Why Are Personal and Family Budgets So Important?

  • March 18, 2019

Personal/ Family budgets, or spending plans, are tools that can help you meet your financial goals. The process of building a budget can help you to take a hard look at your priorities and to determine whether you’re on track to reaching your financial goals.

A budget is a list of expenses and income. It is the amounts of money that currently comes in and out each month/year. It is also the projected in and out amounts of each month/year.

Displaying anticipated income and expenses allows for a prioritization of expenses, like making mortgage or loan payments before spending money on entertainment and travel. A projected budget provides a framework for making decisions about expenses, such as cancelling premium cable services or to saving money for a new auto-mobile. A budget allows you to monitor how close you are to your goals. This knowledge can help you to create budget plans that connect with your daily habits.

The budgeting process is designed to be flexible; and you should have an expectation that a budget will change from month to month, and will require ongoing monthly review. Expense overruns in one category of a budget should in the next month be accounted for or prevented. For example, if you or your family spends $50 more than planned on groceries, next month’s budget should reflect a$50 increase and decreases of $50 in other parts of their budget.

Precautions need to be taken for budgeting on an irregular income. Budgets with irregular income should keep two things in mind: spending more than your average income, and running out of money even when your income is on average.

A budget needs to estimate your average (yearly) income. Spending, which will be relatively constant, needs to be maintained below that amount. A budget should allow for error and so keeping expenses 5% or 10% below the estimated income is a conservative approach. When done correctly, your budget should end any given year with about 5% of their income left over. Of course being conservative and having more than 5% is never a bad idea.

To avoid running out of money because expenses occur before the money actually arrives a “safety cushion” of excess cash (to cover those months when actual income is below estimations) should be implemented. There is no easy way to develop a safety cushion, so you will have to spend less you earn. Developing a cushion can be a challenging particularly when starting during a low spot in your earning cycle, although this is how most budgets begin. In general, personal and family budgets that start out with expenses that are 5% or 10% below your average income and should slowly develop a cushion of savings that can be accessed when earnings are below average. Whether this rate of building your cushion cushion is fast enough depends upon on how variable your income is, and whether the budgeting process starts at a high or low point during the earnings cycles.

Below are tips on how to create a personal budget

Budgeting 101

Why a budget is so important? It seems like creating a budget is just a tedious exercise, especially if you feel your finances are already in good working order. But you would be surprised how valuable a budget is. A budget can help keep your spending on track and uncover hidden cash flow problems that could free up more money to put toward your other financial goals.

How to Create a Budget?

The hardest part of creating a budget is creating one. It’s like staring at a blank piece of paper when you need to write something, the first step is the hardest part.

Tips for Budgeting Success

Once you’ve taken the time to create a budget it’s time to follow it. You can have the best of intentions of following a budget, but after a few weeks or months you drift away from your plan. Don’t let that happen to you. Here are a few basic tips that will ensure your budget is a success.

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