When it comes to personal finance, earning money is only one side of the equation. How you choose to use the cash you make can be just as important as earning it in the first place. Creating a household budget -- a detailed list of how you plan to use your income -- can help you take control your finances and work toward long-term goals.
Paying the Bills
Perhaps the most important function of a personal budget is to set aside enough money to pay all your living expenses each month. If you don't account for all your recurring expenses -- rent or mortgage payments, student loans, car loans and credit card bills -- you might come up short at the end of the month, forcing you to borrow or tap into savings to make up the difference. Sticking to a budget can give you the peace of mind that you'll have the funds you need to cover normal expenses.
Lenders look at your credit score whenever you apply for a loan or credit line to determine how risky it is to lend you money. A high credit score can increase the chances of being approved for new loans and allow you qualify for lower interest rates. A home budget that allocates cash to cover all your debts helps ensures that you pay all your loans and credit cards on time, the most important factor in determining your credit score. That means a following your budget can build your credit worthiness over time.
A budget is an essential tool for achieving long-term financial goals like building up an emergency fund, saving for vacations and putting cash away for retirement. If you don't create a budget and set aside a portion of your income as savings, you might end up spending too much of the cash you have left over after paying your bills on eating out, entertainment and shopping, things that won't benefit you down the road.
Updating Your Budget
Though creating a budget is a good first step toward taking control of your personal finances, it isn't something that can just do and forget. Your income, expenses and financial goals are likely to change over time, so it's important to revise your budget periodically to account for those changes. For instance, if you get a raise at work you'll have extra money you can commit toward retirement savings. However, unless you actually make a conscious effort to work extra savings into your budget, you might end up spending it on other things.
- CNN Money: 10 Steps To Making A Financial Budget
- CNN Money: Setting budget and Financial Goals
- TODAY Money: Build A Family Budget That Actually Works
- Australian Securities & Investments Commission: Household budgets
- Federal Trade Commission. "Making a Budget." Accessed April 1, 2020.
- Bank of America. "How to Prioritize Your Savings Goals." Accessed April 1, 2020.
- Bank of America. "5 Reasons Your Budget Isn’t Working." Accessed April 1, 2020.
- Bank of America. "8 Simple Ways to Save Money." Accessed April 1, 2020.
- Consumer Financial Protection Bureau. "What Is a Certificate of Deposit (CD)?" Accessed April 1, 2020.
- Experian. "Can You Pause Your Credit Card?" Accessed April 1, 2020.
- Chime. "How to Make a Budget: A Guide to Choosing the Right Budgeting Style." Accessed April 1, 2020.
- University of Kansas. "Section 1. Planning and Writing an Annual Budget." Accessed April 1, 2020.
Gregory Hamel has been a writer since September 2008 and has also authored three novels. He has a Bachelor of Arts in economics from St. Olaf College. Hamel maintains a blog focused on massive open online courses and computer programming.