Hopefully, you already understand the importance of having a budget. Using a budget is a great way to keep your financial life on track, as it helps you to make day-to-day buying decisions based on your income and other financial commitments. However, just a basic budget might not always do the job, depending on your situation. In some cases, it may be necessary to develop a cash budget.
What is a cash budget? Basically, a cash budget is one that is going to not only identify how much money you have available and how much you can spend, but also it is going to attach a time line to those points.
So, for example, your cash budget would outline exactly when you expect to receive income, and when you expect to pay bills. In this way, you can see the flow of your money throughout the month, and you will be able to identify any problems that might be ahead.
Not only is a cash budget a great way to get a complete picture of your finances, but it can also help you to save money over the long term. Here are three specific examples of how a cash budget may help you save more money.
Avoid Paying Interest
What happens when you run out of cash to pay specific bills? Most likely, those bills go on a credit card until you have the money available to pay them off. Unfortunately, that may mean paying interest, which is simply a waste of your money.
If you have a cash budget, you can avoid running out of money at the wrong time, meaning you can leave your credit cards alone most of the year. Steering clear of spending money on interest is one of the most important things you can do for your financial well-being.
A Realistic Picture
Charting out the flow of cash you will have in your personal bank account over the course of a month can provide you with a realistic ? and perhaps, sobering ? picture of your financial reality. With that information in front of you, it is possible that you will be more compelled to strictly stick to your budget all month long. Knowing that even a couple of minor extra purchases could put you in trouble from a cash flow perspective may be all the motivation you need to be disciplined.
Long-Term Savings
Budgeting is not only about making ends meet from month to month, but it is also about saving money over the long haul. With that in mind, having a cash budget can help you to keep an eye on the future by ensuring there is also enough cash on hand to move into a savings account or emergency fund. Place an emphasis on savings in your personal budgeting plan and you stand a great chance to follow a path toward a great financial future.
Adjusting to a cash budget can be difficult at first, but over time it will become easier to adjust to not using credit or debit cards for your spending. The benefits of a cash budget far out weigh the hassles for most people.
Have you ever used a cash budget? Did it help you save money?
Photo courtesy of: Brett_Hondow
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When I think of a “cash budget” I think of only spending cash – no debit or credit cards. Sort of like Dave Ramsey recommends. I haven’t heard of it used this way before. What exactly would you say the differences are between this model and a “normal” budgeting process?