Which purpose of budget?

Do you often wonder where does your monthly salary go when there are still bills to be paid? Do you lose sleep at night wondering, if you suddenly lost your job how you will meet your expenses for the next few months? Are your children upset with you because the vacation that you were planning, had to be postponed as you are short of funds? Did your parent have a medical emergency and you ended up borrowing money to meet the expense? If the answer to the above is yes, you are not alone. Almost 70% of the population struggles to manage their expenses within their earnings. If you have been in one (or more) of these situations at some point, the one-stop solution to your problems is budgeting.

What is budgeting?

"A budget is telling your money where to go, instead of wondering where it went." – Dave Ramsay Budgeting is the process of creating a spending plan for your money. By creating this spending plan, you can determine in advance whether you will have enough money to do the things you need to do or would like to do. If you see that you don't have enough money to do everything you would like to do, then you can use budgeting to prioritise your expenses and allocate your money to the things that are most important to you.

Why is budgeting important?

1. Gives you a 360° view of your financial standing

Having a budget helps you get a clear idea of how much money you have every month, and how much you can afford to spend while still saving for emergencies and financial goals. Understanding where you are spending money can also give you clarity on how to divide it amongst your needs and wants.

2. Allows you to align your monthly expenses

The mark of a great budget is paying all that you owe and still having some leftover amount at the end of every month. Adjust how you budget your money every month to suit your circumstances. For example, if you have EMIs, pay those before spending on other things, so that you never miss out on a payment ever again.

3. Enables you to fulfil your financial goals

A budget helps you to set financial goals and save up for them - be it saving up the down payment for a home loan, for children’s education or for a business that you plan to start. A budget can help you redirect your money from unnecessary spending to important goals.

4. Helps you save for a rainy day

Budgeting can help you safeguard your finances against unexpected events if you set aside a small amount in your monthly budget to build an emergency fund. Just like an ant saves food every day to prepare for the winter, it's important that you have an emergency fund for any unforeseen circumstances, which is different from saving up for a long-term goal. Set aside a small percentage of your income until you have enough money to cover at least three to six months’ worth of expenses.

5. Curbs excessive borrowing

With a budget, you can manage your expenses within your income and stop unnecessary borrowing for every big or small expense. Impulsively spending on unnecessary things reduces your spending power every month as more and more of your money is directed towards paying interest costs or for things that won’t have any value in the long run. With a budget, you can even plan for those months when you have additional expenses due to festivals, parties, gifts for weddings, or a destination vacation etc.

6. Reduces money-related stress

"A big part of financial freedom is having your heart and mind free from worry about the what-ifs of life." - Suze Orman

Having a budget can help manage your money wisely, thus relieving you of stress and sleepless nights. This means that you will be able to afford that extra takeout meal without wondering if you’re cutting into your dream home! While crunching numbers may not be your idea of an ideal Sunday, taking time out to budget every once in a while allows you to spend money with confidence. Thus, budgeting becomes the foundation of your pursuit of financial happiness.

Pro tip: To reduce the time and effort spent on managing your money on the weekends, use a budgeting app to quickly record all your expenses every single day.

A budget helps create financial stability. By tracking expenses and following a plan, a budget makes it easier to pay bills on time, build an emergency fund, and save for major expenses such as a car or home. Overall, a budget puts a person on stronger financial footing for both the day-to-day and the long term.

A budget is an essential management tool for any business; it is a component of a plan and forecast for a period of time. The period could be annual, quarterly or monthly, and the budget details how the over-all plan will be financially executed. Budget control can greatly assist with the daily operation and future growth of a business.

Budgeting provides a systematic way of reviewing estimated with actual results, coordinating future activities and setting realistic targets. It is an effective management tool and benefits include:

The main limitations of budgeting are as follows:

Budget and forecast reports must always be developed, completed and communicated well before the period to which they relate.

This is important to ensure that stakeholders have a reasonable opportunity to consider the information provided in the reports and make any decisions as a result of the reports on a timely basis.

There are no strict rules in determining the length of a budget period. As a general rule, it should be long enough to show the effect of management policies yet short enough so that estimates can be made with reasonable accuracy.

It is not good enough to set and forget your budget. Reviewing actual results against budgeted estimates on a regular basis allows the manager to be confident that they are in control and on track to achieving the planned position.

The frequency of budget monitoring may be specified in the Budget Policies and Procedures.

It is common for budgets to be reviewed:

The advancement in better performing computer systems is enabling performance to be reviewed more regularly. In some instances, reviews and comparisons are able to be performed on-demand and in close proximity to real-time results.

Some budgets are prepared on a rolling or a continuous basis. This means they are continually updated so that it will always reflect plans for the same length of time, e.g. six (6) weeks.  With rolling budgets, a new time period e.g. a month or quarter is added, and the corresponding period just completed drops off.  A cashflow budget is often prepared in this manner.

A capital expense budget is often a longer-range budget as these detail the businesses plans to acquire plant and equipment over a long period of time such as 10 years, or even longer.

When it comes to personal finance, you’ve probably heard, or been told that you need to live on a budget. But if you have your spending under control, or you think you handle your finances well enough, you might not see the point. But truthfully, budgeting is well worth your time. So, what is the purpose of a budget?

The purpose of a budget is to plan, organize, track, and improve your financial situation. In other words, from controlling your spending to consistently saving and investing a portion of your income, a budget helps you stay on course in pursuit of your long-term financial goals.

The tough sell is that budgeting is not just a quick fix. If you start budgeting with the attitude that it will instantly solve all your financial problems, you are bound for disappointment. Budgeting is hard work. It takes consistency over a long period of time.

The good news is that if you dedicate yourself to a budget, the financial results you will experience are phenomenal. But, if you still can’t see the purpose of a budget, here are 10 awesome reasons to jump on the budgeting bandwagon.

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For most people, the reason they get into budgeting in the first place, is to increase the amount of money they save each month. Honestly, this was the case for me.

Truthfully, when you start planning out your financial life, it is hard not to find areas to save money. Whether you are just spending too much money on frivolous purchases, or spending more money on groceries than you really need, budgeting helps you find areas to save a little extra money.

Plus, one of the staples of good budgeting, is planning out your savings and paying yourself first. In other words, instead of making a paycheck, spending money, and saving whatever financial scraps are left over, budgeting helps you plan your finances so you can save first.

This places a higher level of priority on saving money, which can only lead to one thing: a bigger savings account.

I don’t think I’ve ever met a person that enjoys feeling out of control. And when it comes to finance, living even a little out of control can lead to major problems.

Budgeting keeps everything in check, and puts you in the driver’s seat of your finances.

So, instead of letting your financial life just happen to you, you can take the reins and direct it where you want to go. And the more disciplined you are with your budget, the more your money will behave.

In this day and age, it’s more common to hear people worrying about their credit score than their net worth. But budgeting will shift that mindset in you.

When you start planning, monitoring, and getting better with your money, you will find something amazing happens. Your net worth will begin to increase.

For example, if you are disciplined with your budget, you will learn to control your spending, which will help you save money. In addition, if you are in debt, budgeting will help you plan a debt payoff strategy, which will reduce your total liabilities and increase your net worth. Finally, budgeting will help you allocate more money to investments, which will put your money to work, and grow your net worth.

The first step in the budgeting process is to set some financial goals. In fact, we have discussed this at length in a number of other posts, and I highly recommend you go read those after this one. For example, check out our post: How To Make A Budget In 10 Simple Steps.

Anyway, part of setting financial goals, is developing a plan to achieve them. And that’s where your budget will shine.

Allow me to explain.

If you were to set a goal of saving $10,000 in the next 12 months, you can divide $10,000 by 12 months and get your monthly savings goal of $834. Now, with your budget, all you have to do is plan your saving and spending to make it work. Then, all you have to do is stick to the budget, and you will for sure meet your goal.

Heck, you might even find that your goals are a little too easy, and that if you stick to a budget you could save $15,000 per year or more. You won’t know until you get on a budget.

I’m going to take a leap of faith here and guess that you don’t enjoy financial stress. Whether that means worrying about making your monthly rent payments, paying off your student loans, getting out of credit card debt, or just affording groceries, financial stress can be debilitating.

The good news is, budgeting can take a lot of the financial worries out of your life.

Think about it, if you create a plan for your finances each month, and know exactly what you can and can’t spend your money on, you are eliminating most of the unknown in your financial life.

As I mentioned earlier, this will help you to feel like you are more in control, which will in turn, reduce a lot of your financial stress.

Debt is a monster that feeds on your financial success. Seriously, when it comes to your net worth, debt is literally a liability.

But, if you aren’t on a budget, you might not realize how much money you are actually spending on debt each month.

I know from experience.

The day my wife and I got on a budget was the day we realized how much money we were paying toward debt each month, and it sickened us. Sure, we knew how much money we were paying to each individual lender, but we had never taken the time to add it up and let it sink in.

And the day we did, we vowed to get out of debt, and never go back into debt again.

Budgeting saved our financial future by opening our eyes to how much debt we were paying, but it also helped us create a road map to eliminate it. And honestly, and we believe it’s the key to staying out of debt.

Related: Debt Snowball Calculator

Money fights in marriage are a very real problem. When you take two people that have handled their finances on their own for their entire adult life, and then combine their finances, there’s bound to be some disagreements.

Budgeting, however, is the best way to prevent these uncomfortable financial arguments.

First of all, budgeting as a couple forces you to get on the same page, and plan your future together. When you both take the time to come up with a financial plan you agree on, you are being proactive instead of reactive. Plus, you are teaming up instead of combating one another.

Additionally, if one of you decides to overspend, or deviate from the plan, you can’t get mad at your spouse because you participated in the budgeting process.

Budgeting in marriage holds you accountable, and keeps you focused on a goal, rather than fighting with each other.

The more you focus on budgeting, the more you will begin to place priority on your financial goals. When you take time each day to track your expenses, reconcile your budget, and make sure you are staying on track, it is like a little reminder to stay focused on what really matters.

So, when you go shopping, you won’t just be thinking about how bad you want that pair of shoes, you will also be weighing that purchase against your financial success. Trust me, you are much less likely to spend money on stuff you don’t actually need, when you have multiple goals topping your priority list.

Ok, so this could probably go at the very top of this list, but budgeting helps you identify all sorts of wasteful spending in your finances. And identifying (and eliminating) wasteful spending is one of the best ways to increase your savings.

For example, when my wife and I first started budgeting, we realized that we were spending way too much on car insurance. So, we did some shopping and found a much better rate for the same amount of coverage. Then, we decided we were over-paying for internet, so we called our provider and cut our monthly bill in half. We even discovered we had been paying for a couple small app subscriptions that were just slipping under the radar each month. Not anymore, because our budget wouldn’t allow it.

When you start budgeting, you will be amazed at all the waste you can find in your day-to-day spending.

There’s no two ways about it, sticking with a budget takes self-discipline. You have to be a self-starter. You have to wake up each day and commit to abiding by the budget you put in place.

By doing this, you will be developing your self-discipline. And the more disciplined you become with your budget, the better the financial results will be.

The best part is that budgeting is a self-reinforcing process. You see, the more results you see from your budgeting, the more you will want to stick with it. And the longer you stick with your budget, the better your finances will be.

It is a never-ending loop of financial improvement. And it all starts with budgeting.

Budgeting has a lot of upside. Sure, the main purpose might be to improve your financial life. But I would go as far to say that it improves your life as a whole.

In fact, the next time somebody asks me about the purpose of budgeting, I am just going to say, it will make your life better.