If you’re hoping to grow your wealth in the New Year, before you even begin to look at things like investing and savings, there’s an even more important step to take first: setting a budget.
Budgeting may seem so simple that you overlook it, thinking you’ve already got a good enough snapshot of your finances in your mind. Chances are, however, that there’s something you’re missing, which might be an essential part of wealth building.
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“At its core, budgeting is about making informed decisions to ensure that revenue not only covers present expenses but also lays the groundwork for future financial success. This simple concept of managing cash flow is critical in establishing a secure financial foundation and developing wealth,” according to Martin Mulyadi, professor of accounting at Shenandoah University School of Business.
He and other experts explain why budgeting is essential to wealth building in 2024.
A Roadmap for Your Finances
Budgeting is essentially a roadmap for your finances, said Taylor Kovar, a certified financial planner, CEO and founder of Kovar Wealth Management.
“It gives you control over your money, allowing you to make informed decisions about spending, saving and investing.”
Setting a budget is being proactive about where your money should go, rather than wondering where it went, he explained.
“This control is crucial for avoiding overspending and for ensuring that your financial resources are being used effectively to meet your goals,” Kovar said.
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Budgeting Helps you Plan
A budget is a strategic way to plan for a goal, whether short term like saving for a vacation or long term like retirement, Kovar explained.
“Budgeting allows you to allocate resources towards these goals systematically,” he said. “By earmarking funds for specific objectives, you’re more likely to achieve them. This goal-oriented approach is essential for wealth accumulation.”
It Helps You Reduce Debt
Effective budgeting is also key to managing and reducing debt, Kovar said, a key component in being able to build wealth eventually.
“By tracking income and expenses, you can identify opportunities to reduce unnecessary spending and allocate more funds towards debt repayment.”
This is particularly important for high-interest debts, which can hinder wealth accumulation, he said.
Budgeting Enables Savings
Budgeting enables you to set aside money for savings, Kovar said. When you see what money is available, you can start to build up your savings.
“This includes building an emergency fund, which can cover unexpected expenses and prevent the need for high-interest borrowing,” Kovar said.
“Additionally, regular savings contribute to the creation of a financial buffer, ensuring you’re prepared for life’s uncertainties.”
Review Your Budget
Keep in mind that a budget isn’t static and should be reviewed and adjusted regularly, Mulyadi urged.
“The changing nature of the economic environment needs constant budget evaluations and modifications,” he said. “To ensure that the budget remains relevant and effective, changes in income, expenses and financial goals should be represented.”
Set Clear Goals
To begin budgeting, start by understanding your monthly income and where your money is currently going, Kovar said.
He recommended whatever tools work best for you, be that budgeting apps or simple spreadsheets to track your expenses.
“Then, define clear, achievable financial goals,” he said. “Whether it’s paying off debt, saving for a house, or investing for retirement, your goals should guide your budgeting process.”
Flip the Mental Switch
When thinking about budgeting, “It’s important to flip the switch from thinking it’s an exercise that’s constraining to it’s an exercise that’s empowering. You become in control of information and all the decision making,” said Linda Kitchens CFP, director of wealth management at Aspiriant.
Follow These Simple Steps
Budgeting is as simple as listing your income and then your expenses using your best estimates, Kitchens said.
“Your income sources are probably fairly few and straightforward. If you’ve already been using an ATM card or credit card for purchases, look back a few months to determine what you have been spending your money on to determine costs.”
Next, compare the two.
“If your income for the period is greater than expenses, sweet, you have the option to add to savings or some flexibility for spending,” she said. “If your expected expenses exceed income, you have early warning to cut costs or find a way to make more money.”
Finally, break your figures down to monthly or even weekly amounts.
“Those will be the most accurate and useful figures to help you make many small, everyday decisions about spending,” she explained.
Automate Your Savings
Lastly, once you’ve used your budget to identify funds for saving or investing, “If there is money left over, a great way to get started accumulating wealth is to put a line item on your budget for savings and have the amount automatically deposited into your savings or investment account each month,” said Aviva Pinto, a certified divorce financial analyst and managing director with Wealthspire Advisors.
Forced savings that you don’t see are less likely to be spent, she explained.
Most importantly, Kitchens added, “Do not panic.”
It’s not uncommon to find some surprises in your spending habits. Regular reviews of your budget will help you get your spending on track.
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This article originally appeared on GOBankingRates.com: Experts Explain: Why Budgeting Is Key to Growing Your Wealth in 2024 and Where To Start
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
