written by: ciel s cantoria•edited by: Donna Cosmato•updated: 9/8/2011
The importance of financial planning is not only about planning and budgeting as a means to allocate your monthly income. It's also about implementing simple money management solutions to achieve cost reduction, afford more economical options, and most importantly, eliminate debt.
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The Need for Financial Planning and Budgeting
Most households learned the importance of financial planning and budgeting only recently as part of the hard knocks lessons learned at the height of the 2008 global financial crisis.
The Bureau of Labor and Statistics released an analysis report, which stated that to many people, the concept of money management meant spending hours sorting out bills and statements of accounts. After doing so, the next step was to find out ways to juggle one's funds. Actually, this scenario happens when people spend without making any effort to keep track of how much they have already paid out.
It is often a simple case of overspending because there is no plan and budget on how to allocate the money that comes in. Instead, budgeting was practiced as a post plan of how the remaining money could be spread over basic necessities. In fact, part of the budgeting strategy included the deferment of paying current bills until the next paycheck.
Nonetheless, most finally came to their senses and realized the importance of budgeting and how to make it easier. The secret is to break the process down into smaller processes and prioritize.
Follow these guidelines on how to come up with a workable budget using simple money management solutions. As you go along, you will understand the rationale behind the importance of planning and budgeting expenses.
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1. Re-Assess Your Past Expenditures
Start by re-assessing expenses for the past six months; however, an entire year yields better data.
Evaluate each of the purchases under the “Need" category; consider them as eligible expenses for budget allocation. They are fixed expenses such as rent, loan amortizations, insurance, car loan, and other amounts that do not vary from month to month.
Include in the "need" section the fixed variables. These are expenses that have to be met each month but amounts vary. Fixed variables include groceries, car maintenance, fuel, phone, electricity, gas, and water.
Determine the monthly average of each type of expense. To find the average, divide the total of each fixed variable expense by six months. The resulting quotient is the average monthly expense.
Next, evaluate the “want" items and try to think clearly. Did these purchases improve your lifestyle and finances? Where are they now? Actually, they usually represent things you could have done without. The money spent for them could have been saved and allocated to an emergency fund. Examples of what to include under this list are the expenses for clothes, accessories, gadgets, cable, DVDs, dining out, and all the spur-of-the moment purchases.
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2. Pay Heed to Money Management and Budgeting Tips
After going through the re-assessment process, you can:
Plan and budget by considering only the "need" items or those fixed expenses and the fixed variable expenses. The latter should be budgeted based on the average monthly expense.
The total amount of what you spent under the "want" lists is divided by six months, and the amount derived is budgeted as your monthly savings deposit allocation.
Try to meet this goal because the money you save enables you to buy the things you want on a cash basis.
Cash purchases entail less cost because you do not have to pay credit card interests for the items. The latter only increases the unwarranted or unnecessary burdens on your monthly household income.
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3. Incorporate Simple Money Management Solutions
Managing finances is not only about budgeting but also about maximizing earnings by either cutting down on costs, finding cheaper options, eliminating debts, or implementing all these recommendations. Consider these financial planning solutions:
Close or cancel all your credit cards.-
If you cannot live without a credit card, maintain just one primary credit card. Choose the one offering cash back rewards in actual cash form rather than a reduction on the next purchase. However, leave the card at home, and use it for emergency purposes only. Do not be enticed into making more credit purchases just to realize some “cash back" rewards.
Keep it in mind that the "rewards" are only reductions of the charges added to your credit purchase. Additional credit purchases mean additional interest charges to be paid, which are in greater proportion than the cash back reductions. Buying on a cash basis generates greater savings, since you only pay for the purchase price, sans any interests or credit card charges.
Please proceed to the next page for more financial planning and budgeting tips.
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Consider putting all your debts into a debt consolidation agreement -
Stop buying on credit, and then put all debts into one consolidated loan. A debt consolidation company helps individuals pay off all loans in a matter of two to four years. They are experts at financial planning and budgeting and work out a more affordable payment plan on your behalf, which could be approved by all your creditors. This method not only relieves you of stress, but also saves fees, additional penalties, or accrued interests. These charges tend to surmount due to your inability to pay–off debts as they become due. However, it is best to ask the help of a company or professional that comes highly recommended or with good feedbacks elicited from forum sites.
Put your bills under a system of automated payments -
Check banks for the availability of this service. In using this system, checking accounts or savings accounts are automatically debited for monthly bills like electricity, gas, cable, water, insurance, and debt payments. The system automatically earmarks fund deposits, thus giving you a form of restraint from spending money set aside for fixed expenses.
Find ways to reduce the costs you incur on your property -
If you are currently paying a home mortgage, consider having it refinanced so you can work out lower monthly amortizations. Some homes increased in value recently and yours might be one of them, which could entitle you to lower interest rates. Check with your lender to see if you are entitled to rebates in case of early or prompt payments. This way, you can further reduce your amortizations. If on the other hand, the market value of your property decreased, check if your property was revalued by your tax assessor. You might be entitled to a reduction of real estate taxes.
If you’re renting and the cost is eating up more than 25 percent of your monthly income, consider finding a housing option that fits your earning capacity. According to the Census Bureau, the average housing cost experienced by households is 20 percent; hence, to go beyond this, means you’re paying more than the average.
Find ways to reduce your car expenses-
If your car seems to be eating gas and generating high maintenance costs, consider sellingit. In budgeting, every dollar counts, and maintaining an automobile is recommended only for those who have a lot of cash to spare. This simply means feeding yourself first instead of spending money on a car.
Find ways to reduce your insurance costs -
If you’re paying for several types of insurance, make a direct deal with an insurance company in the form of a package policy that combines all your insurance needs. Instead of passing through different insurance agents, reduce your insurance premiums by the amount of the agent’s commission added by the insurance company as part of your insurance costs.
Be wary of memberships in wholesale stores, gyms and other subscription-based service facilities -
The key here is frequency of use and availability of products in order to benefit from this marketing scheme. However, if your use is limited by choice, by availability, or by the terms and conditions, you may be realizing a limited discount benefit. In fact, you may not even be realizing a total annual discount that would at least equal the annual membership fee you're paying.
If the younger family members feel deprived and still cannot grasp the importance of financial planning and budgeting, be patient and find cash to buy some of their wants by selling unused clothes, shoes, bags, equipments, gadgets, furniture, and so forth at auction sites. Manage finances further by divesting closets of things that have not been used for quite some time and make some money out of them. That way, instead of fretting about the small closet space, make more room by weeding out useless space-eaters.