Living on a budget is a smart financial idea for several reasons. It helps manage debt, it ensures you live within your means and it helps increase your cash flow. Living paycheck to paycheck is OK if you want to get by day to day, month to month. Increasing your cash flow can help you live a more financially stable life, plan for the future and avoid panic if you have a sudden financial emergency.
A budget sets spending limits based on your income and tracks your spending to ensure you’re staying on track a.k.a. living in the black, not in the red.
A budget starts by tracking your income and sets spending limits for your monthly expenses including housing, transportation and savings.
A common budget strategy is the 50/30/30 rule. It suggests that 50 per cent of your after-tax income should be spent on fixed costs such as rent, car payments and utilities. 30 per cent of your after-tax income should be allocated towards flexible spending and variable monthly costs such as groceries, entertainment and personal shopping. The final 20 per cent should be set aside for both long term and short term savings. This budget method allows you to avoid getting into debt and takes debt payments into consideration. It also allows you to live beyond your next paycheck.
Here are three ways why budgeting helps increase your cash flow:
Start an emergency savings fund
When you set a spending cap a.k.a. live on a budget it always ensures there is room for savings. If you currently live paycheck to paycheck what would happen if your car broke down and you had an unexpected repair expense or if your basement flooded and you needed to pay for the damage.
How would that affect your daily living? For many people it would mean they needed to charge the new expenses on their credit card and that can lead to expensive interest charges. If you set a portion of the 20 per cent aside in a short-term emergency savings fund it will lower the financial impact (and stress) of an unexpected expense.
Pay off debt sooner
Debt is easy to accumulate, but takes a long time to pay off. Setting a budget can increase your cash flow and that newfound cash can be used to make extra payments to your outstanding debt. The sooner you pay off your debt the more you’ll save on interest charges and the sooner you can start allocating that money towards other goals.
Achieve your personal goals
Some people think that living on a budget means getting paid, paying your bills and using whatever money you have leftover at the end of the month for personal expenses. That’s OK, but what happens if there is no money leftover at the end of the month?
Living on a set budget with predetermined expenses ensures that you achieve all your personal goals from travel and milestones to retirement. If you don’t have a positive cash flow at the end of the month how can you work and save towards your personal goals? You can’t.
Using a financial planning tool can make it easy to set goals, track your net worth and manage your investments. Start today to see how budgeting can increase your cash flow and help reach your goals. Check out Wela, open a free account account today as it gives you an array of tools to help you manage your spending and save for a rainy day.