The purpose of a budget is to do what?
Ever wondered, what is the purpose of a budget?
Why everyone talks about creating a budget first thing when it comes to taking control of your finances?
Well, it’s because the budget is the only tool that can help to improve your overall financial health.
It helps you keep track of your money so that you can cut down on expenditures and prioritize savings to achieve your financial goals.
In this post, let’s learn about the importance of budgeting and why do you need it!
What is a budget?
Before we dive in further, let’s first discuss what is a budget?
A budget is a financial plan that determines how you spend your money in a definite period.
It helps you achieve your financial goals by keeping track of your income, expenditures and savings.
This allows you to be aware of your overall financial health and take measures to achieve your long-term financial goals.
What is the main purpose of the budget?
And now let’s look at what is the purpose of a budget?
It helps in growing your savings
When you think about budgeting, the first thing that comes to your mind is saving more money.
When you start keeping track of money, you know how much money is coming in and what are you spending it on?
This helps you in cutting down on unnecessary expenses and finding more ways to save money.
Also, when you’re not budgeting, you spend money throughout the month and then save whatever is left by the end of the month (that too if anything is left).
But, that’s not the case with budgeting. When you budget, you make savings the priority by keeping money aside for savings first and then making a plan to spend the rest of the money. This is called “paying yourself first”
You can see your savings grow in a matter of time when you save first and then spend.
It helps in taking complete control of your finances
Your financial life can go completely haywire if you lose control of your finances. It may create bigger problems in your life.
With budgeting, you’re in complete control of your finances. You can keep track of every dollar that comes in and goes out of your bank account/wallet.
This gives you the power of directing your money and deciding how you want to spend it instead of losing track and spending it mindlessly.
Budgeting helps in preparing for major life changes
There will be many life events that will affect your family’s finances from time to time.
It can be events like having a baby, buying a house, kids going to college, etc.
The purpose of a budget is to help you prepare for major life events in advance when you already know what you’re earning and how much are you spending.
It also allows you to start saving for these future expenses well ahead in time so that there is no immediate financial burden to deal with.
It helps in identifying wasteful expenditures
When you budget, you review each one of your expenses and you can easily find areas where you can cut down on your expenses.
When you start looking at your day-to-day expenses more closely, you will be surprised to find many wasteful expenditures that can be avoided.
If you looking for ways to cut down on your food expenses, you should check out my post on how to save money on grocery shopping.
For instance, when I started with budgeting, I and my husband reviewed our monthly subscriptions and found 6 subscription services that we haven’t used in months. They were being charged on our credit card and we never noticed them. It was a $70 savings per month instantly.
It reduces financial stress
Having a written plan of action helps in reducing your financial worries.
Without a budget, you’re unsure about your financial situation and have no idea if the money in your bank account would be enough to cover your monthly expenses.
But when you create a budget, you have a plan about how much is your income and how much will you spend on rent, gas, groceries, and other expenses.
With everything laid out on a spreadsheet or paper, you have a sense of security that you have enough to get through leaving little or no room for uncertainties.
This reduces the stress of living paycheck to paycheck.
It helps in increasing your net worth
When you start budgeting, you make saving money and being debt-free your priority, which in turn increases your net worth.
Let’s see how?
You start saving more when you start budgeting to achieve your financial goals. To achieve those goals, you start investing your savings to earn better returns.
So, this helps you in accumulating wealth over some time and in turn increasing your net worth.
Similarly, when you decide to be debt-free, you start focusing on repaying your debts and avoid taking any further debts. This helps in reducing your liabilities and increasing your net worth.
It helps in achieving financial goals faster
You create a budget essentially to achieve certain financial goals.
It helps you in determining how much money you can save each month and how long you need to reach your money goals.
For instance, if you plan to save $12,000 in the span of the next 12 months, then you need to save at least $1,000 a month to reach your goal comfortably.
Now when you create your budget you will set aside money for your savings and adjust your expenditures accordingly.
It’s only with budgeting that you will be able to prioritize your financial goals and then adjusting your expenses in whatever money is left by finding ways to save more money.
It keeps you accountable
Budgeting is a self-commitment to yourself that you ready to improve your overall financial health.
And in this process, the purpose of a budget is to keeps you accountable and committed to achieving your goals.
It ensures that you make only the expenses you included in the budget and saving at least the amount of money you planned for in the budget.
You will become more and more committed to budgeting as you see the results and witness your finances improve.
So, the more you stick with your budget, the better will be the results. But, to achieve this, you need to create a budget plan and stay accountable for it.
It gets you out of debt faster
Once you start budgeting, you can see how much amount of money you’re putting towards repaying the debt each month.
Also, debt is a negative investment. The interest on debt cancels out any interest on investments that you earn.
So, if you have debt, you cannot grow your net worth until it is all paid.
Budgeting helps you in finding ways to get out of debt faster by avoiding unnecessary expenses. Also, it helps in planning your finances so well that you don’t have to take any debt in the future again.
It helps in reducing financial arguments
Finances are one of the top-most reasons behind the majority of divorces in the US.
There will be disagreements if you and your partner are on the same page regarding finances.
Budgeting allows you and your partner to discuss your finances and create a financial plan that works best for your family.
You can work as a team and review all your financial transactions to make sure that you’re on track to achieve the financial goals you have set for your family.
Also, having a budget keeps you and your partner accountable so that you spend within the limits you have set yourself while budgeting.
How to Create a Budget
Now, that you have learned about the objectives of budgeting, let’s look at how to create a budget.
I am going to go over the process briefly here and you check my other post for the detailed process for creating a monthly budget for your family.
Step 1: Set your financial goals
First, you need to set the financial goals that you want to achieve with budgeting. It can be as simple as saving for your retirement fund, saving for a house down payment, paying off debt, and so on.
This will help you understand how much money you need to set aside each month for achieving your financial goals in life.
Step 2: Write down your monthly income
Start with writing all your income (after-taxes) line by line. Make sure to list all your household incomes coming from various sources like freelancing, interest, rent, etc.
Step 3: Make a list of your fixed monthly expenses
In this step, you need to list your fixed monthly expenses only that you pay on a month-to-month basis. It can be expenses like rent, mortgage payments, groceries, phone bills, car payments, and so on.
You can look at your bills from the last 3 to 6 months to determine your recurring monthly expenses.
Step 4: Make a note of seasonal and irregular expenses
You also need to make room for expenses that pop up occasionally so that they are no surprises. It can be expenses like medical bills, taxes, back to school shopping, etc.
Having them as expenses on the budget will help you put away a small amount every month, while you’re saving money for them.
Step 5: Record your adjustable expenses
So far, we covered the expenses to fulfill your “NEEDS” now it’s time for the “WANTS”
These are the expenses like dining out, movies, gadgets, clothing, Christmas shopping and so on that are avoidable if you don’t have a room for them.
Step 6: It’s time for the math
At this step, you subtract your expenses from the income to make sure that you have enough money to save for your financial goals.
You make the adjustments to balance expenditures and savings. You want to find a comfortable sweet spot to ensure you are keeping aside enough money to cover your needs as well as saving money.
Step 7: Review, adjust and repeat
To make budgeting successful, you need to continuously review and adjust your budget based on the information you have.
Keep reviewing your bank statements or cash balances every week to ensure you’re right on track with your monthly budgeted expenses.
Note: You can prepare your budget on a piece of paper or a blank spreadsheet in MS-Excel. You can also check out this post where I shared the “Best Blank Budget Templates” from other personal finance experts.
They are all FREE to download and some of them provide expense categories or a spot to plan for financial goals. This makes the whole process of budgeting easier.
Final thoughts on the purpose of budgeting
Your financial situation can make or break your life.
The whole process of budgeting might seem overwhelming at first. But it is a powerful tool that can get your finances under control.
It is evident from the benefits of budgeting above that it can help you get all the financial stress out of your life easily.
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