How Far Out Should You Be Planning Your Budget?
Planning your budget is a crucial part of shaping your financial future. By keeping track of your spending, earning, and saving patterns, you can nip bad habits in the bud and take control of your short-term and long-term financial goals.
Understanding how far in advance you should be planning your budget, why it matters, and when to consider reshaping your existing budget are important steps to realizing your financial wellness dreams.
Why a Budget Matters
A personal budget is, quite simply, a way of tracking how much you earn, save, and spend each month. By cutting back over time on your everyday spending and setting a certain amount of your income aside, you can ensure that you'll be prepared for emergencies or unexpected expenses well into the future.
Many individuals, couples, and families find the act of creating a budget empowering as they take the reins when it comes to their spending and saving. Whether you want to save up for college, enjoy the bliss of being debt-free, look forward to early retirement, or just finally take that vacation to Bali, a budget is your most useful tool in reaching your financial goals.
Planning Your Budget Timeline
The first step in crafting your budget is deciding how far in advance you'll be tracking your income and expenses. While it's possible to create an effective weekly, monthly, or quarterly budget, the "gold standard" is to track your finances on a month-to-month basis.
Why monthly? A weekly budget can be too micro. It's easy to get bogged down in the details and sweat the small stuff if you're having to keep track of your spending every single day. Keeping your budget should be as simple as possible, not a never-ending chore.
Meanwhile, a quarterly budget is too broad and could result in unrealistic expectations. It's too early to tell if you'll need your car fixed eight weeks from now, or if you'll get a promotion in a few months and have to adjust your budget based on your new income.
A monthly budget is the perfect "sweet spot" between too detailed and labor-intensive, and too big-picture to be helpful. Planning your budget on a month-to-month basis is further simplified if you're paid twice a month.
4 Simple Steps to Planning Your Budget
Ready to take charge of your finances? Here are four steps to help plan your budget:
- Determine Your Income After Taxes: Use a calculator to help find out what your income is after taxes are taken out. Remember to take a look at your regular business expenses, automatic deductions for savings and retirement, and any extra income you pull in from side jobs or freelancing to make this number as accurate as possible.
- Divide Your Spending and Expenses into Categories: Categories may include "Food," "Rent," "Clothing," "Tuition," "Credit Cards," and so forth. Include both essential and non-essential categories and focus on what you know to be recurring expenses rather than one-time purchases. You can track your monthly income, saving, and spending with budgeting tools.
- Set Aside a Fixed Amount for Your Savings: Based on your current expenses and income, determine how much to put aside in a savings account each month. If it makes sense for your situation, you can set aside a different amount for each month in order to account for things like holiday spending or planned vacations.
- Readjust Your Budget as Needed: Your budget should be as flexible as you are. After all, your spending and earning cycles will change over time as your family grows, you take on more responsibilities, or your personal goals shift.
Planning your budget is about mapping out a financial future for yourself and your family with optimism. There's no better way to ensure that your finances work for you rather than the other way around than to take control of your money with a solid personal budget.