A financial plan should be written one, however simple. This provides a permanent record of your financial position and gives you a track to run on. This is its strength – where its value lies. The problem is many people do not know how much it costs them to run their lives. They have not even done the simple things such as making a note of their basic recurring costs and setting aside money to cover them. They know these will keep coming up each month but they cannot tell you how much they are. Without this knowledge, any financial planning is based on false assumptions and loses a lot of its value.
Our Most Important Asset
One of the basics of financial planning is a person’s net income – the amount of money left after taxes. Another basic is the net income after expenses. In other words, the amount of money left after taxes and after expenses. It is essential to know this for meaningful financial planning of savings and investments. For most of us, until we accumulate significant income-earning assets, our income is our most important asset. Without an income we cannot fund our investment plans. The only real way to determine our actual net income and the amount available to build future income-earning assets is by personal budgeting.
Where Does Our Money Go?
Some people are wary of having too close a look at their financial position because they are afraid of the bad news. They simply do not want to know. Yet, this is exactly why personal budgeting is so important – it uncovers the mistakes in our money management and gives us a chance to correct them. This knowledge helps us get on track and to make sure we are living within our means. Of course, an easy way to tell if we are living within our means is to check if we have money left over after we have covered all our living costs for the month. If we don’t, we need to find out why.
Discover More Money
Personal budgeting does more than highlight what terrible money managers we are. It also helps us to fine tune our management skills. This is one of it real strengths – uncovering money we did not know we had. It can highlight areas where we are spending money in the wrong way. It makes us question where our money is going and whether we are getting the best value for it. Often, this will free up additional money to save and, ultimately, to invest.
If you make personal budgeting part of your monthly routine, you may discover money you did not know you had. You can then use this money to take the step into financial planning.