A:

Creating and using a budget is a valuable tool for all demographics; it's not just for those who need to closely monitor their cash flows from month to month because "money is tight". For people who earn enough income to cover their bills and have a regular monthly surplus, a budget can help maximize investment capital by earmarking regular allocations to investment vehicles such as retirement accounts, college education plans (such as Section 529 Plans) and personal investment accounts.

Now if one's monthly expenses typically consume up the lion's share of net income, any budget should focus on identifying and classifying all the expenses that occur during the month, quarter and year. Doing so will allow you to see when you should put sufficient money aside for those regular necessary expenditures (such as home and/or car insurance premiums).

Some goals for the person whose cash flow is tight can include identifying expenses that could be reduced or cut (such as entertainment and shopping), as well as minimizing any interest being paid on credit cards, home equity line of credit (HELOC), and the like. Interest costs eat away at spending money, and sometimes these costs can be minimized by determining a spending outline that takes the whole year into account. For instance, creating a regularly-funded "Christmas Club" could keep the credit card bills from spiking come December because there would be available cash on-hand.

Budgets are especially useful when a major life change is on the horizon, such as moving to a new home, having a child, or entering retirement. These situations generally bring shocks to any existing spending patterns, but good foresight into their costs and a good amount of savings provide the best chance to have the funds necessary to get through them smoothly.

There's also an inevitable psychological effect from creating a budget and laying all your expenses "on the table". Small purchases can and do add up, and many people find that just by looking at aggregate figures for discretionary spending, they are spurred to change their patterns and reduce excessive spending. Also, having a budget laid out in which all the anticipated expenses for the year are accounted for can be very satisfying - and can remove a large weight off your mind and shoulders.

For more information on creating a budget, check out Six Months To A Better Budget and The Beauty of Budgeting.

RELATED FAQS
  1. Why would a company choose to operate on a deficit budget in lieu of a balanced budget?

    Learn how companies can strategically use deficit budgets in the short term to get off the ground, expand and work through ... Read Answer >>
  2. How does online banking assist with budgeting?

    Setting up online banking can make a personal budget easier to manage through the use of multiple accounts or expense categories ... Read Answer >>
  3. How can you use a cash flow statement to make a budget?

    Understand how a cash flow statement can be used to create a company budget. Learn the difference between a cash budget and ... Read Answer >>
  4. How does a nation's national debt affect the budget process?

    See how the national debt has traditionally impacted, or purported to impact, the budgeting process for the U.S. federal ... Read Answer >>
  5. What mobile apps are best for tracking your cash budget?

    Discover the best mobile apps for tracking cash budgets to manage spending, increase savings and improve your overall financial ... Read Answer >>
Related Articles
  1. Personal Finance

    How to Create a Budget You Can Stick With

    Following a budget can be difficult. But it’s usually the difference between living a stressful retirement versus the retirement of your dreams.
  2. Personal Finance

    How Budgeting Works for Companies

    Learn how to break down and understand a corporate budget.
  3. Personal Finance

    The Complete Guide To Planning A Yearly Budget

    A personal budget is a useful tool for tracking your income and expenses.
  4. Personal Finance

    5 Reasons Why You Can't Stick To Your Budget

    You want to stay on track with your finances, but these fatal budgeting flaws may be holding you back.
  5. Personal Finance

    5 Budgeting Steps for Young Families

    Here are five steps young families can take to create and stick to a budget.
  6. Personal Finance

    6 Reasons Why You NEED A Budget

    By now, you're probably sick of hearing the b word. Too bad. This is just of those financial lessons that cannot be preached enough.
  7. Small Business

    Explaining the Cash Budget

    A cash budget is a plan for the inflows and outflows of cash for a business or an individual.
RELATED TERMS
  1. Budget

    An estimation of the revenue and expenses over a specified future ...
  2. Annual Budget

    Any budget that is prepared for a 12-month period. An annual ...
  3. Balanced Budget

    A situation in financial planning or the budgeting process where ...
  4. Budget Manual

    A set of instructions used within large organizations to prepare ...
  5. Budget Surplus

    A situation in which income exceeds expenditures. The term "budget ...
  6. Personal Spending Plan

    Similar to a budget, a personal spending plan helps outline where ...
Hot Definitions
  1. Five Cs Of Credit

    A method used by lenders to determine the credit worthiness of potential borrowers. The system weighs five characteristics ...
  2. Straddle

    An options strategy in which the investor holds a position in both a call and put with the same strike price and expiration ...
  3. Trickle-Down Theory

    An economic idea which states that decreasing marginal and capital gains tax rates - especially for corporations, investors ...
  4. North American Free Trade Agreement - NAFTA

    A regulation implemented on Jan. 1, 1994, that eventually eliminated tariffs to encourage economic activity between the United ...
  5. Agency Theory

    A supposition that explains the relationship between principals and agents in business. Agency theory is concerned with resolving ...
  6. Treasury Bill - T-Bill

    A short-term debt obligation backed by the U.S. government with a maturity of less than one year. T-bills are sold in denominations ...
Trading Center