How Budgeting is Key to a Successful Financial Plan - Summit Financial
How Budgeting is Key to a Successful Financial Plan
Nov 4, 2021 | Blog, Financial News
Budgeting is the foundation of every successful financial plan. A budget helps you identify sources of income and expenses, which allows you to manage your cash flow accordingly. The goal of budgeting is to maximize your net cash flow by increasing your income sources or reducing unnecessary expenses.
Budgeting is the management of incoming cash and outgoing expenses
The goal of budgeting is to maximize net cash flow by reducing unnecessary expenses
Incoming Cash Flow – Expenses – Savings = $0
Creating a Budgeting Worksheet
We recommend our clients use an excel spreadsheet to update their budget periodically with a few clicks of the mouse. We have an in-house document that identifies just about every monthly/annual expense you could think of, and the spreadsheet will automatically calculate your net cash flow. (Let us know if you would like a copy!)
Not everyone has the option to increase their income, but this is the most obvious way to increase your cash flow since income is the beginning of the budgeting equation. If you can get a promotion, work extra hours, pick up an additional job, etc., then your overall incoming cash flow should be higher. This will give you a cash flow head start and be more flexible with your expenses or savings.
Since increasing income is not usually an option, most people use a budget to control their expenses. By listing every expense, you can identify areas that may be too high or too frequent. For example, if you spend $1,000 per month at restaurants and only $200 at the grocery store, then perhaps you can flip these around and try to save on your food bills. Maybe your cable bill is $100 per month, but you have another $50 in streaming subscriptions. This could be a sign to cut back, perhaps one or the other. By listing every expense that you incur, you may be able to find weaknesses or areas of overspending in your budget.
Believe it or not, but every dollar you earn is allocated towards a financial goal, even if you are not aware of it! Every dollar of incoming cash flow is geared towards either spending or saving, so if your accounts are not increasing in value every month, then this means your untracked dollars are all being allocated towards expenses. It is generally preferred that you can set aside savings every month towards a future financial goal rather than spending all of your incoming cash flow. Without a budget, you may be allocating more money to expenses than you realize, and perhaps you could reroute that spending towards savings.
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