Along with establishing or improving your credit situation (see “Understanding Credit” and “Credit Report Resolution”) and savings (see “Saving for (Any) Day”), maintaining and adjusting a monthly budget is vital to financial health. Many consumers are unaware of how much income they actually have available, or where it goes. This prevents them from saving, and allows them to amass debt or interest, even when there is available money for expenses.

You should keep in mind that budgeting, savings, and credit are interrelated. All three work together to form your consumer profile and demonstrates your ability to manage your finances. If you have any major financial plans in the future, like buying a home or starting an investment portfolio (see budgeting-help.com for resources), budgeting, savings, and credit management are the foundations to those goals.

Before You Begin

You probably stumbled on this article because you are reeling from past money mismanagement, or are trying to break bad money management habits. Beyond just the act of creating a budget, you have to make certain changes to your outlook about budgeting and money before you can use it wisely.

Many people have the perception that budgeting means cutting away all enjoyment in life in order to save on expenses. They think it means you should somehow diminish you quality of life by not using air conditioning (even though you live in desert area), stop driving altogether (even though you commute 15-20 miles to work), or never go to the movies, eat dinner at a restaurant, or buy new books (even though you enjoy reading, eating, and films).

In actuality, having a budget will clarify not only your expenses, but also how much money you really make---there’s often more than people think when they actually account for all of their earnings. It will also allow you some stability in case of emergencies or special occasions; as you properly allocate your income for fixed and periodic expenses, you can have funds set aside for momentary or unforeseen events. Overall, having a budget may actually help you improve you quality of life, because you’ll know what in life you are paying for.

Some authors also suggest that a need to spend money frivolously or avoid budgeting has psychological correlates. People often identify their own personality and positive attributes with their spending power, and connect their self-worth with their net worth. It may be necessary to develop greater self-esteem independent of spending. One way to break the connection is by adhering to well-planned budget to test where your spending behavior is modified by your beliefs about money.

Please see “Budgeting Pitfalls” and “Types of Budgets” to get prepared on creating a budget, and to prevent giving up on a budget when there are signs it may not be working with your finances.

References

Mgichome.com. Develop a Budget
Financialplan.about.com. The Psychology of Spending Money