Why Budget? (Part 2): It Makes You Responsible

 Tristan Martin via Compfight

In this short series, I have been discussing five reasons why creating a budget is important and a key factor in achieving your financial goals. The first reason for budgeting involved confronting bad habits.

Reason #2: Creating a Budget Makes You Face Your Reality and Makes You Responsible for Your Future

Many people live their lives with no purpose or direction. Even if they do not do that in every aspect of their lives, for some reason, people tend to live that way with their finances. It does not matter if it is someone going from minimum wage job to slightly above minimum wage job or someone with several graduate degrees and a lucrative income. Oftentimes, we are simply ignorant or unaware of the things we already have, which oftentimes ends up keeping us from winning. Sometimes, our unwillingness to face our own reality prevents us from having to make the necessary changes to improve our lives.

Creating a budget will force you to take a big picture look at your finances. For some people, it will be like taking an inventory of their entire lives. In addition to documenting the expenses you need to reduce or eliminate, creating a budget will force you to look at what you have and reach one of two conclusions:

1. I am not making enough to meet my goals. What am I going to do about that?
2. I am making a lot more money than I realize. Why am I in such a financial mess?

 

I believe that there are more people in the second camp than many are willing to admit. We make a reasonable amount of money, but our choices prevent us from  making the most of what we earn.

So, what ways can we become less financially “ignorant?”

1. Take your 2012 W-2 forms and know exactly how much you made in the previous year. If you are in a new job or you have irregular income, make the best estimate on how much you plan to make in 2013. (If you are married, both of you should know each other’s information.)
2. Ask yourself this question: Do I need to make more money this instant in order to improve my financial situation, or do I need to make better spending decisions? (Aspiring to make more money isn’t bad, but it won’t solve your problems if you have bad spending habits.)
3. Compare your expense list you created in post 1 and compare it to your income. Do you have money left over or are you spending more than you take in?

Knowing what you actually make is a key ingredient to writing a good budget. Once you are aware of what you already have, you can use it to your advantage or realize that you have to make whatever changes are needed to improve it.

Question: Do you know how much you make? What realizations did you have when you compared your income to your typical expenses?