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. What's the difference between budgeting and financial forecasting?

    Learn about financial budgeting and financial forecasting and the main differences between the two management decision-making ... Read Answer >>
  2. 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 >>
  3. 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 >>
  4. What is the best software for calculating the cash budget of an individual?

    Explore the options and features of several leading personal finance tools to find the best software for calculating your ... Read Answer >>
  5. How can you calculate your cash budget in Excel?

    Using Excel to track income and spending, estimate the effects of lifestyle changes, and present the information in ways ... Read Answer >>
Related Articles
  1. Personal Finance

    Here's How to Create a Successful Budget

    Break your expenses into needs, wants, and savings goals for a budget plan you can stick to.
  2. Trading

    Top 5 Budgeting Questions Answered

    You don't need a degree to understand your money, begin saving and pay down debt.
  3. 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.
  4. Personal Finance

    3 Alternative Budgeting Styles: Which One Suits You?

    Not everyone is cut out for online or heavily-involved budgeting. Here are some budgeting solutions.
  5. Small Business

    Budgeting Your Small Business

    Budgeting helps small businesses determine if they have enough money to fund operations, expand and generate income.
  6. Personal Finance

    4 Easy Techniques for Budgeting Money

    Budgeting money is critical for everyone, but to be successful at creating and sticking to a plan, it’s helpful to have some tricks up your sleeve.
  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. Balanced Budget

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

    A set of instructions used within large organizations to prepare ...
  3. Activity-Based Budgeting - ABB

    A method of budgeting in which the activities that incur costs ...
  4. Zero-Based Budgeting - ZBB

    A method of budgeting in which all expenses must be justified ...
  5. Budget Planning Calendar

    A schedule of activities that must be completed in order to create ...
  6. Treasury Budget

    Data released by the U.S. Treasury on a monthly basis that accounts ...
Hot Definitions
  1. Market Capitalization

    The total dollar market value of all of a company's outstanding shares. Market capitalization is calculated by multiplying ...
  2. Frexit

    Frexit – short for "French exit" – is a French spinoff of the term Brexit, which emerged when the United Kingdom voted to ...
  3. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  4. Down Round

    A round of financing where investors purchase stock from a company at a lower valuation than the valuation placed upon the ...
  5. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  6. Portfolio Investment

    A holding of an asset in a portfolio. A portfolio investment is made with the expectation of earning a return on it. This ...
Trading Center