The Importance of Creating a Budget

Creating a budget can be very difficult for some, especially when finances are tight. But it is something that everyone should do for their financial well-being. Keep in mind, creating a personal budget doesn’t have to be complicated because there are plenty of free resources and organizations that can simplify budgeting and help you navigate through the entire process.

It doesn’t matter what age you are; most people have some type of debt, and if you have debt you need to have money or resources to offset that debt. In other words, you are working and receiving a paycheck or some form of income (let’s call your income your assets) to offset the debts you incur (liabilities, or for simplicity we’ll say debt). Obviously, if you have more debt than you have assets, you have to figure out the best way to pay those debts down.

Now, don’t worry most people have debt. For example, rent and utilities are debts. Buying a car to get to and from work and the gas to keep it running usually requires incurring debt. And, incurring debt isn’t necessarily a bad thing because in most cases it’s necessary. Sometimes you may find it’s better to buy something and incur debt rather than renting- especially if interest rates are low, because it helps you build good credit.

According to debt.org, an organization that provides online personal financial information to help people understand and eliminate debt, the average amount of debt for each age group:

< 35: $67,400
35–44: $133,100
45–54: $134,600
55–64: $108,300
65–74: $66,000
75 and up: $34,500

And, as you can see it doesn’t matter how old you are, you are most likely going to have debt throughout your life. Throughout life, most people experience life stages that require investments, which may cause you to incur debt like when you go to college, get married, buy a house, have children, retire and those are just some of the life experiences. There are also emergencies like losing a job, an unexpected illness or tragic event that may change your finances.

The more we plan and prepare for the future and the unforeseen circumstances in our lives, the more financial sound we’ll be. But that requires planning and one of the most important elements of financial planning requires budgeting and creating a budget.

Budgeting Made Simple.
So where do we start? The best way to start is to write down all of the debts you incur each month. If you pay some of your debts quarterly or yearly just divide the total you owe by the number of months you’re paying for, (so if you pay $600 for car insurance every 6 months – it would be a $100 per month debt). Some of the debt you incur, will have to be averaged or you will have to guess because those debts vary from month to month (food and eating out will vary each month, so just look back and what you’ve been spending and that will help you figure out what your monthly debt is about each month).

It’s the varying debt like food, clothing and miscellaneous spending that causes problems for most people. First of all, since these expenses vary from month to month, it’s hard to figure out what the monthly debt will be. When creating a budget, you have to try to estimate what your spending will be and try to adhere to the budget as much as possible.

However, people tend to overspend on varying budget categories, because they’re using credit cards to pay for these type of items – which means out of sight, out of mind. In other words, you forget what you bought at the beginning of the month and continue spending because the money is not being deducted from your assets as you spend it.

According to Experian, one of the nation’s top credit bureaus that financial institutions use to determine your credit worthiness, the average consumer debt is as follows:

Type of Debt   |  Average Debt in 2020
Credit Card         $5,315
Personal Loan    $16,458
Auto Loan           $19,703
Student Loan     $38,792
HELOC                 $41,954
Mortgage            $208,185

And, in most cases these debts build over time. You go to college so you’ll have a good career, but you’ll need a car to get to and from your new job. Next, you’ll need somewhere to live, and while you may start out renting eventually you’ll want to buy your own home. Then you’ll need furniture and appliances, so you may take out a loan using your home as collateral (Home equity or home equity line of credit) to purchase all the things you need for your home.

These debts are part of the spending cycle, and the more you plan and save, the better off financially you will be. And, the best way to plan for your financial future is by creating a budget, so here’s a link to help you start your budgeting process courtesy of consumer.gov: View Budgeting Worksheet.