Budgeting is an important aspect of personal finance especially to a household. It determines the liquidity of the household. Liquidity is the ability to meet short term requirements. In case of a shortage of cash to meet requirements, the household’s bread winner or money maker will have to resort to borrowing. The most popular of which is the credit card. Credit card is a tool to ‘bridge’ a financial gap for the household, supposedly. However, its convenience to use coupled by aggressive marketing of companies in selling their products and the usual mall sales lead to a financial challenge that is expected to mount as months go by. This situation is further aggravated by the lack of budgeting and monitoring of income and expenses. Suppose to be, a budget strain will give rise to the use of a credit card. But, in most cases, a person starts budgeting the moment credit card balances start piling up or until a collection company starts sending summons and legal notices.
These two things, budgeting and credit card, therefore, can go together providing harmony or could lead to a financial predicament. The question is: Which came first? As illustrated above, the budget should have come ahead before using a credit card to ease a financial strain. For if the budgeting is carried out well, the use of the credit card will be more prudent and justified. Budgeting shows how the money is spent prospectively compared to the income that will be generated. Hence, a neatly prepared budget projects an impending scenario of a positive financial status or a negative one. Either situation poses a concern though. Granting that the budget is followed which resulted to some extra cash on hand, the concern is what to do next? Conversely, when the expenses exceed the income, how should one deal with it? Obviously, the first scenario is preferred. Unfortunately for many, the latter scenario is more frequent. The use of credit card these days is more prevalent than when I started using one in the early 90’s. Credit card companies then were very conservative and selective. I had to make a ‘hold out deposit’ in exchange for my first credit card. Nowadays, you can choose in the variety of credit cards. Companies are lax in providing one without the necessity of requirements nor a hold out deposit. As such, the perils of financial mismanagement are magnified.
Therefore, the lesson is budgeting is a preventive tool for financial predicaments. The problem for many is that it is hard for them to sustain the practice, especially, when expenses are getting out of control. But, come to think of it, in times of difficulty, budgeting becomes more compelling. You will never realize its benefits until you are able to do a one year budget and have formed a habit in doing so. In my next article, I will introduce several ways to do budgeting.