What Is The Purpose of a Budget?
Budgets are more than just numbers on a spreadsheet. The purpose of a budget is to help you track your income and expenses, but budgeting offers much more than that. Read on to learn the many purposes of a budget and why budgeting is important.
What Is The Purpose of a Budget?
The primary purpose of a budget is to track your income and your expenses. But that’s not all a budget does for you. Your budget helps you plan, monitor your spending, identify issues, and improve your financial health.
By creating a budget and sticking to it, you can ensure that you have your needs covered, pay your bills on time, get out of debt, and meet your financial goals.
Budgeting Puts You in Control
For the longest time, I had no clue where all my money went. I just knew at the end of the month I didn’t have any. So I racked up a bunch of credit card debt.
When I was drowning in debt, I felt like I worked for the credit card companies. After rent, food spending, and utilities, most of my money went toward my card balances.
The banks owned me. I felt like I had no control over my spending or finances.
Budgeting got me through that.
Budgeting is important because it gives you an accurate picture of your finances so you can figure out your goals and work towards them. When I finally turned to budgeting, my top priority was getting out of debt.
Following the plan I mapped out for myself, it didn’t feel so hopeless. There were some rough spots, but I was seeing progress, which motivated me to stay with the plan. I finally felt like I was in control of my bills, not the other way around.
Budgeting Takes the Stress Out of Money Management
Which is more stressful: paying all your bills on time or going on a shopping binge then having no idea how you will pay your credit card bills when they arrive?
How many hours of sleep have you lost worrying about money?
Uncertainty is stressful. Knowing is not stressful at all. When you create a smart budget, the nights of tossing and turning are over.
A budget is like having all the answers to the test beforehand. You know where your money is going and when before you get paid. When a bill comes in, you already know how to pay it.
Budgeting Gets You and Your Partner on the Same Page
Ever argue with your partner about money? If so, I’m not surprised. Experts cite money as one of the top reasons for divorce.
When two people who are used to managing their money on their own get together, they’re bringing their own ideas about personal finance to the table. Combine their finances and there’s bound to be disagreements.
Maybe your spouse wants a new car every 2 years, but you’d rather drive your current, fully paid off car until it dies. Or maybe you’re OK with carrying a credit card balance and paying interest while your partner always pays their balance every month.
You probably won’t agree on everything. Working together to set a budget and stick to it focuses your attention on building a life together rather than fighting over money.
A Budget Helps You Build an Emergency Fund
Life throws many surprises your way. Not all of them are fun. Many of them are not cheap.
Are you equipped to handle a large unexpected expense?
Things like job loss, illness or injury, or major car problems can lead to financial issues along with the problem you’re already facing. There’s never a perfect time for emergencies like these to happen, but the best thing you can do is prepare.
Putting aside an emergency fund of three to six months living expenses is essential to your financial well-being. In times of trouble, you’ll have some time and some runway to recover.
Using a budget gives you a solid grasp of how much you need to save in your emergency fund. It also provides a plan for putting money into your emergency fund until you reach your goal.
A Budget Gets You Out of Debt Faster and Keeps You Out of Debt
Nothing ruins your financial future faster than bad debt. By bad debt, I mean debt you take on to buy things that are quickly used up, rapidly lose their value, or do not generate any long-term income or profit.
Once you’re on a budget, your bills will be on track and you’ll spot opportunities to reduce your spending. As you cut from one category or expense, apply the money you free up toward paying down debt.
The amount of interest you pay over time on credit cards with interest rates of 18-25% is jaw dropping. If you’re just paying the minimums or carrying balances, getting on a budget and focusing on paying down your debts might be the best thing you could do to improve your financial outlook.
Budgeting Helps You Live Within Your Means
With easy access to credit, it’s easy to overspend. Some people don’t even realize they’re doing it until they’re up to their eyeballs in debt.
When you create and follow your budget, you don’t spend money you don’t have. You know how much you earn, how much you can spend, and how much you can save. You’ll never find yourself in the position of being overwhelmed by credit card balances and interest.
Is living below your means as fun as going on a wild shopping spree or a lavish vacation? Not in the short term, but the party’s over when the bills come due.
Budgets Help You Find Ways to Cut Your Spending
I can almost guarantee you’ll identify multiple ways you’re overspending once you track your expenses.
Before we started tracking our spending, I would’ve told you we spent about $300 on groceries every month. I was sure that’s all we spent. I was shocked to find out it was nearly twice that.
A budget helps you identify fixed, periodic, and variable expenses you can lower or eliminate. Entertainment, meals out, and unused subscriptions or memberships are prime areas to cut back on. You can even lower the cost of essentials like utilities, insurance, and mobile phone plans if you switch providers or make minor behavior changes like not leaving lights on when you’re not in a room.
The wasteful and unnecessary spending you uncover once you start a budget is amazing.
A Budget Allows You to Save for Major Purchases
We all have major purchases that we need or want to make. Often we need to save up for them before we can buy them. If you want to buy a home, a new car, or go back to school you probably need to save for some length of time.
Budgeting makes saving for a specific purchase easier than trying to come up with the money all at once or putting aside money only when you have extra cash. You can divide the amount you need by 12, then set aside that amount every month.
You treat your savings goal like any other expense you have to pay. In twelve months, you can make the purchase without borrowing.
If you’re struggling with your finances, your budget can also help determine whether the time is right for making a large purchase.
Maybe you find that twelve months is too short a time frame and twenty-four months is more realistic. Or perhaps your budget shows that a decent used car is within reach, but saving for a new car would take longer than you can wait. By looking over your budget, you might find ways to trim your spending or think of ways to earn more money so you can afford your high-ticket item on your timetable.
Sticking to a Budget Enables You to Reach Your Financial Goals
When you first set up your budget, you must set some financial goals. Your goals can include creating an emergency fund, getting out of debt, or getting a month ahead on bills. Budgeting also help you hit a savings goal like saving for a down payment or starting a college fund.
No matter what your goals are, sticking to a budget can help you get there.
For example, if you set a goal of saving $6,000 dollars in the next year, you know you need to save $500 per month for the next 12 months. You can then work that $500 of savings into your budget. Hitting your goal becomes a matter of staying with the plan.
You may have loftier or longer-term goals, but the principle is the same. Work out how much you need to save each month, make it part of your budget, then follow your budget.
Budgets Help You Build Wealth and Save for Retirement
Financial stability begins and ends with your savings. Your budget will ensure that you don’t neglect putting money aside in a savings, retirement, or investment account.
Paying yourself first and saving some money every time you get paid instead of spending it all is how you generate wealth and financial freedom.
It doesn’t matter if you save $5, $50, or $500 a month. The habit of saving every month matters. You can increase the amount you save each month over time as your financial picture improves.
The Purpose of a Budget
The purpose of a budget is to give you an accurate picture of your income, expenses, and savings. Budgeting has the power to reshape your thinking and your life.
You won’t have to live paycheck to paycheck or feel like a slave to debt. You’ll have your goals clearly defined and a roadmap for achieving them.
It doesn’t matter what kind of financial shape you’re in right now. Everyone can benefit from budgeting.
It doesn’t matter which budgeting technique or methods you use or whether you use software or pen and paper. If you’re not budgeting, the best time to start is right now.