Many people cringe when they hear the word “budget.” However, it doesn’t have to be something to fear. Learning how to manage your finances and live below your means will bring you many advantages in life. If you can make one and stick to it, you may even end up with a budget surplus. Here’s why you should add it to your financial goals.
What Is a Budget Surplus?
According to Investopedia, a budget surplus occurs when your income exceeds your expenses. The term “surplus” is normally used when discussing governmental finances, but it can also be applied to personal finance. However, it is more commonly called savings on an individual scale. Either way, having a surplus of money or savings indicate that you effectively manage your finances.
Changes in the economy or spending habits can generate a budget surplus. And when you have additional money, you can create a more stable financial situation for yourself by paying down debts, reinvesting, or saving for the future.
What Are the Pros and Cons of a Budget Surplus?
Having extra funds is usually a sign of prudent financial management. While a surplus is generally considered to be a good thing, simply maintaining it isn’t always to your benefit.
The pros of having a financial cushion seem obvious. First off, it provides a safety net for unforeseen expenses. If you consistently save your surplus, you will always have money when you need it.
Having extra money in the budget also gives you options. You could also put the additional funds towards paying off your debts and boosting your credit score. Or, you could reinvest it to increase your assets and build wealth. The sooner you start investing, the greater your compounding interest will become over the years as well. However, if you are already in a comfortable position for retirement, you also have the option to spend some of it on things you want but don’t necessarily need.
Having extra money can be a huge advantage in life, especially if you know how to put it to work for you. Unfortunately, this requires more than just learning how to save. Letting your money sit in a low-yield checking or savings account means it will depreciate over time. And with inflation rates rising, your cash and emergency funds are losing even more buying power. Therefore, you need to find a way to turn your surplus into a productive asset.
Why Should You Have a Budget Surplus?
It’s pretty clear why people, companies, and governments work to create a budget surplus. When it comes to personal finances, you don’t want to live from paycheck to paycheck. So, learning to live below your means is a good goal to strive for that will help give you more financial stability. Having a healthy savings account and emergency fund allows you to live comfortably and gives you peace of mind if any extenuating circumstances arise.
How Can You Create a Surplus?
When financial advisors talk about budgets, they make it seem so easy. But anyone who has had to live on a budget will tell you how challenging it can be. So, where do you start?
1. Evaluate your current financial situation.
If you want to figure out where to start, you have to look back and evaluate all the factors contributing to your current financial situation. Once you make a list of all your assets and liabilities, you will have a better idea of your total net worth. Then, the next step is to review the last several months of expenses to determine your current budget and decide where to start trimming.
However, you will need to carefully evaluate your budget and honestly assess your spending habits. Make sure you know where your money is going every month, and look for ways to save on your living expenses. I usually start by cutting back on unnecessary things. But, I may eliminate them completely if I have an aggressive savings goal. A more moderate approach is to set spending limits for each budget category. These limits can be weekly, bi-weekly, or monthly, depending on what works best for you.
2. Learn self-discipline.
There are hundreds of ways to make a budget, but none of them will work if you can’t stick to it. Therefore, you need to learn self-discipline and how to tell yourself no. It will be uncomfortable as you adjust to your new budget. Although you will have to make some sacrifices, focus on long-term goals over short-term satisfaction. By practicing self-discipline and adhering to your budget, you will see positive results and hopefully a substantial budget surplus.
3. Invest in your future.
While this piece of advice may seem vague, there are many ways it can be applied to help improve your financial situation. The first is to use your surplus and start building wealth. Even if you are a true beginner, it is never too late to start investing. You don’t need a large lump sum to get started either. Even investing a few hundred dollars consistently will bring you returns.
Another way to create a greater surplus is by investing in yourself. Your knowledge and experience are also valuable assets. And many employers are willing to pay well for the right skill set. Using your surplus to acquire new skills or further your education will only increase your value. And investing in yourself is always a sound decision.
Whatever you decide to do with your budget surplus, there is one thing that is absolutely clear. Don’t let it sit idle. Find a way to put your budget surplus to work for you in building a more financially secure future.
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Jenny Smedra is an avid world traveler, ESL teacher, former archaeologist, and freelance writer. Choosing a life abroad had strengthened her commitment to finding ways to bring people together across language and cultural barriers. While most of her time is dedicated to either working with children, she also enjoys good friends, good food, and new adventures.