For a lot of people, managing their personal finances is not at the top of their to-do list. Whether they have experienced a major financial setback or a significant life change, the route to getting things in order can be a little daunting.
A personal budget and a personal finance plan are great tools to help you organise and manage your finances. I personally know of many people who have completely turned their lives around as a result of taking responsibility for their finances and regaining control.
A personal budget is a breakdown of your income and expenditure into a short, regular finance cycle – usually a month. It is used to track your income and expenditure to ensure you are on track with your budgeted spending and savings.
A personal finance plan is an extended version of the personal budget, in that the information used to create a budget is extended (usually for at least 12 months), adjusted for seasonal fluctuations and tweaked for goals and targets. It allows you to plan for the future of your finances and achieve your financial goals.
Below, we whizz through some of the key benefits of creating a personal budget or personal finance plan.
1. Create more cash
OK, so you may not necessarily ‘create’ more cash, but if you budget effectively, you will notice that you have more disposable cash. When you create a personal budget, you pre-determine the amounts you want to spend in various categories. It’s here that you’ll be able to spot opportunities to spend less.
If you become disciplined and stay on track with the amounts allocated, you’ll be far less likely to overspend, resulting in more available cash.
2. Demolish debt
As you refine the money managing process, you can reallocate the money you’ve saved to tackling any outstanding debts. The process of creating a personal budget plan encourages you to check the status of any outstanding debt and your remaining repayment schedule.
With the increased availability of cash, you could take control of your debt and get it paid off. Once your debts are taken care of, you may find there’s extra cash available to top up your emergency fund, save or start investing.
3. Become more financially attractive
Using a budget or financial plan may not make you more attractive to your romantic partner, but it will definitely make you more attractive to lenders! Improving your money management could directly impact your credit score for the better.
Lenders may be concerned about your ability to repay loans and stay on top of bill payments. Making payments regularly and on time to reduce your debt and using no more than 30% of your available credit could contribute to an improved score. You may be able to access better interest rates and loan terms as a direct result of an improved credit score.
4. Build funds for a rainy day
An often-missed opportunity is the chance to put some of your income away to cover emergencies. Building an emergency fund can help in many ways.
Having funds set aside means you have the cash available to cover any unexpected costs that may arise. You also remove the need to borrow funds from a lender at the last minute, which usually come with awfully high interest rates attached.
5. Become a super saver
Once you start using your personal budget or finance plan, you are likely to identify some additional cash. This may arise from identifying cheaper utility providers, bulk buying opportunities, or taking advantage of discounts and deals.
6. Be a boss at tackling irregular cashflow
A finance plan displays your income and expenditure over a 12-month period (or more). This means fluctuations in disposable income are clearly visible. Knowing that a specific month will incur a higher spend than usual allows you to plan ahead and avoid any possible shortfall.
7. Free up time to let your hair down
If your finances have been bogged down with setbacks, such as missed bills or a shortfall of cash, a finance plan can help alleviate the stress caused by a lack of control. Having a plan keeps you on top of your ins and outs, reduces stress and allows you to enjoy life more.