In 21st century America, the idea of budgeting seems almost passé. After all, with practically unlimited credit available on a seemingly never-ending supply of credit cards, why bother with the discipline of budgeting?
Well, there are plenty of reasons. For starters, budgeting is the first step in the process of building financial discipline in your life. Your success in every other aspect of personal financial management — from saving and investing to retirement planning to buying a home and making responsible everyday purchases — will hinge on your ability to create, and stick to, a basic household budget.
A Simple Concept
Like many things, the process of creating and following a budget is not as hard as people often think it is going to be. The concept of budgeting is actually very simple: Your goal is to plan your spending around how much money actually comes into your household every month. In other words, try to match your expenses with your income.
Unfortunately, many Americans do just the opposite: They essentially buy whatever they want and then hope they make enough money to pay for it. If they don't, they just pay for things they cannot afford with a credit card or installment loan. However, this can be a very dangerous practice over time, as the interest on credit card purchases starts adding up if card balances are not paid in full each month. Eventually, people can end up paying more money in interest than they paid for the items they originally bought in the first place.
Creating a simple household budget can be summarized in three steps:
1. Figure how much money comes in every month. Tally up all of your sources of income so you know exactly what you have to spend each month. For most people, the primary source of income is their salary, but be sure to include any bonuses or commissions you might receive at work. Alimony or child support, government payments and income from a side job or freelance business should also be included to arrive at your monthly net income (or income after taxes).