One of the most important tenets of personal financing is to create and maintain a budget. Remember, a budget is not just about balancing your checkbook — or firing up that copy of Quicken software once a month — but rather formulating a complete picture of your personal finance health (and making informed decisions based on that picture).
While many people “know” they should create a budget, and have heard the mandate about the importance of a budget since they were in grammar school, most individuals don’t know how to organize their budget in a way that serves their financial interests.
Here are five keys to ensuring your budget is organized, insightful and helps pave the way toward your personal financing goals.
How An Organized Budget Can Help Your Personal Financing
1. Know your credit score
What does a credit score have to do with your personal budget?
The harsh truth is that not all “money” is created equal. In the modern world — with our reliance on borrowing money — without a healthy credit score we will literally be “paying” more for the same amount of money than someone else with better credit.
Luckily, as your credit rating improves, you’ll get lower interest rates, which can help you buy a home, refinance debts, build equity and possibly invest in real estate to begin building wealth. A better credit rating can also help you find a better-paying job, finance a business or invest in various financial opportunities that may otherwise not be available.
Steps for improving your credit rating (even if it’s already quite good) include:
- Paying bills before they’re due (even just three days early can help).
- Not using all of your available credit (keeping your debts to one-third of your credit limit).
- Paying off loans with the highest interest first (A no-brainer strategy, but an important one).
- Contacting creditors to make payment arrangements if you can’t pay as agreed.
- Using extra money to reduce your total indebtedness.
2. Track expenses and revisit your budget periodically
As business expert Peter Drucker once said, “what gets measured, gets managed.” And that’s nowhere more true than with the numbers in your personal budget. Take time to track every expense, as if your life were a stock and you were expected to report credits and debits to the Securities and Exchange Commission (SEC).
Be sure to remember one thing: a budget is not a fixed thing, but an organic (often-changing) document. Prices rise, income can move up or down and life changes can dramatically affect spending. Temporary fluctuations can be caused by one-time events like repairs, unexpected expenses or taking time off from work due to illness and/or personal issues.
An ideal budget has built-in flexibility, but your situation can change from day-to-day and week-to-week. A severe winter can devastate a family’s heating budget while simultaneously making it difficult to work as many hours. Even commodities — such as cable, water or electricity — can change drastically, which can affect your overall budget.
Remember, not all changes to your budget are bad. You could find a little extra money, or the price of a particular expense may have gone down. Your goal is not have a “finished” budget — but instead a resource that you can use to understanding personal finance and make quick, sound financial decisions. And this means tracking what you spend and examining your budget frequently.
3. Use financial planning software
You don’t need a business degree to understand personal finance basics. The keys to successful financial planning include leveraging equity, paying off debts, generating alternative income streams and minimizing expenses.
With financial software platforms, many of which are free, you can explore different scenarios for savings, IRAs, insurance products, refinancing loans, 401(k)s and potential investments. There are plenty of budget templates, loan calculators and other online resources that allow you to make quick and accurate calculations, regardless of how complex your financial situation might be.
The key is to find financial planning software that works for your personality and consumption behavior. Each of them have different interfaces — some are geared toward use on a mobile device, others for more desktop use. Try a few out, on a trial basis, and hone in on one you’ll actually use, not what everybody claims is the best.
4. Set milestones to reach goals
Budgets are a fantastic way to get a snapshot of your current financial health, and look for ways to curb spending and boost savings. But without concrete financial goals in your personal budget, it’s hard to know exactly what all this “saving” is actually for.
Some of the best personal finance advice you’ll ever receive is to link up concrete positive financial goals — such as buying a home, starting a business, financing college, providing for retirement and saving funds for both long-term purposes and short-term emergencies — with an existing budget.
You’ll feel motivated to stick to a budget, because you’ll know exactly what’s at stake. Even if you’re living paycheck-to-paycheck, you’ll have a compelling vision of the financial future you want to create (which can often give you that added boost of confidence you need to keep going in the midst of difficult, financial times).
5. Realize taxes are a strategy, not an inevitability
Oliver Wendell Holmes, Jr., the Supreme Court Justice, offered had some interesting advice of his own: “Taxes are what we pay for in a civilized society.” Tax evasion is illegal, but tax strategies are perfectly legal, and allow you to keep more of your hard-earned cash.
Even modest incomes can build financial equity by capitalizing on every opportunity to use pretax dollars, such as investing in IRAs and taking advantages of legal deductions, tax credits and tax-advantaged investments.
Real estate investing, as an example, offers good tax advantages for building wealth. As BankRate detailed recently: you can realize up to $250,000 for a single filer or $500,000 for a married couple in tax-free capital gains from the sale of a primary residence every two years. You can also deduct mortgage interest for your primary and secondary residences up to certain limits.
If you own a small business, you can deduct some job-related expenses, such as a home office. Even your business structure can have significant tax implications based on whether it’s a sole proprietorship, partnership, corporation or S corporation. Getting good tax advice becomes increasingly important as you earn more money or begin investing activities, so see a professional before moving forward with any strategies you may have in mind. The key is to be diligent in finding opportunities to boost your savings, in regards to taxes, and not assume the number you must pay the government is set in stone.
What an organized budget can do for you
There is no one perfect way to organize a budget, just as there is no perfect way to organize your personal financing in a way that helps you reach your ideal financial goals.
By gathering as much financial information as you can — credit score, tax opportunities, your constantly-evolving expenditures — and keeping an eye clearly on where you’re going, you’ll do far more than win “Most Organized Budget of the Year.” You’ll be that much closer to realizing your financial dreams.