Having a budget is one of the most important tools in your personal finance arsenal. A budget is what allows you to decide where your money goes instead of having to figure out where it went. In this article, we will answer the all-important question – What is the purpose of a budget?
The primary purpose of a budget is to keep a track of your income and expenses, so you always have enough money for all the things that you essentially need. It helps you to plan, track, improve and organize your personal finance situation so that you are always in control of your long and short-term financial goals.
A well-optimized budget can help you save money, invest what you save and as a result, make you more money. Having a budgeting plan can ensure that you have the funds for all your needs, help you get out of debt, have money to pay bills, live a stress-free life and much more.
It might seem like a waste of time for some but let me help you figure out the purpose of a personal budget by listing down all its benefits below, and maybe, I’ll be able to change your mind by the end of this article.
Purpose of a Budget and Its Benefits
1. Know where your money is going
How many times have you felt like your monthly income just disappeared before you could even realize it? We’ve all been there at some point.
Knowing all the different things that you end up spending money on throughout the month is crucial. And having a budget in place helps you do exactly that.
We all love to splurge on different things. Some might love their morning muffins and coffee whereas, some like to spend generously on drinks on their clubbing night out.
Spending on these things is not particularly wrong as long as you know you’re spending on them from the designated part of your budget and not spending it out of your, for example, rent money.
A well-thought-out budget helps you to divide your expenses into categories like fixed expenditures, travel, food, medical costs, partying, etc. So you have an exact idea of where all your money ends up going.
2. Increase your savings
One of the primary objectives of having a good functional budget is to increase your savings, at least for me.
When you start budgeting, you realize all the unnecessary things that you keep splurging on. For example, buying more expensive brands of items while grocery shopping. A budget allows you to identify and cut down on all these kinds of extra, mostly unnecessary, expenditures.
Additionally, one of the biggest advantages of having a well-thought-out budget is it will ask you to pay yourself first. What this means is that whenever you get some money, be it your monthly income or a gift from grandma, you should always save some part of it first before spending it on things like bills or fixed expenditures.
This results in you prioritizing saving money over spending it, which in turn results in a bigger savings account!
3. Be prepared for emergencies
Life can be really uncertain at times and throw some unexpected challenges at you. And some of them are not going to be cheap to tackle.
Have you ever wondered if you’re financially well-equipped to handle an emergency, like an unexpected illness or accident?
Situations like a sudden job loss or a major car breakdown costing big money can be thrown at us at any time. And sometimes, when we least expect it and are in financial trouble already.
We need to be well-prepared to be able to handle such circumstances and that’s where budgeting plays a huge role. A budget will allow us to build and maintain an emergency fund.
A budget provides us with a plan for saving and putting money aside for an emergency fund. An ideal emergency fund should have three to six months worth of living expenses as it provides us with a safety cushion in case of an undesired event.
4. Achieve your financial goals
Before starting on a budget, it is important to have certain financial goals listed down. This creates a certain motivation to stick to your budget plan.
Financial goals can be of various types like getting out of debt, buying a new car, going on that vacation you’ve been long wanting to, etc.
The purpose of a budget in this scenario would be to help you meet these important goals that eventually enable you to lead a more fulfilling life that you’re in control of.
For instance, if your personal goal is to save $20,000 by the end of the year, you can divide it by 12 months which means you will have to save $1,666 per month to reach your goal.
A budget will help you to plan your savings and expenditure in a way that allows you to save that amount every month. And if you stick to it, you will certainly reach such goals with complete ease.
5. Live within your means
We live in a consumer-focused society. And with easy access to credit these days, a lot of people end up spending way more than they earn.
This puts them in the vicious maze of credit card bills, debt and interest.
When you follow a well-planned budget, you don’t end up spending money that you don’t have. You know exactly how much money you’re making, how much you can save and how much you can spend.
This leaves you stress-free as you don’t have to worry about credit card bills and interest piling up at the end of the month.
It can be tempting to go out and spend money on a night out from your credit card when you’re out of money but in the long run, it is going to give you more headaches than the short-term pleasure of a single night of partying.
6. Get (and stay) out of debt
Debt can be one of the biggest enemies of a healthy financial life. It can prey upon and destroy any of the financial goals that you may have.
It is easy to lose track of exactly how much you end up spending towards debt if you aren’t following a budget.
With a budget, you will have money saved from other expense categories that you can then put towards paying off your debts faster, which should be on the top of your priority list.
And once you do, it is equally as important to stay out of debt as it is to get out of it. And a well-optimized budget will help you do exactly that by reducing unnecessary expenditures and allocating funds for essential expenses. It is the key to getting out of debt (and staying out of it).
7. Reduce financial stress
Living without stress is absolutely priceless. There might be enough personal and work-related stress in our daily lives as it is, and worrying about our finances just makes matters worse.
Worrying about things like credit card debts, monthly rentals, bills, student loans, etc. can bring a lot of unneeded financial stress.
On the bright side, budgeting can help you eliminate a lot of these financial worries.
Having a clearly defined plan in a budget about the things you can and cannot spend money on eliminates uncertainty. And knowing exactly how to pay for the various expenses beforehand can bring you complete peace of mind.
8. Plan major purchases
We all have certain big purchases that we wish to make at different points in our lifetime. Be it the next big house, a new car or starting a new business, they all require us to have a considerable amount of money saved up.
A well-thought-out budget enables us to plan for these kinds of major purchases in advance and hence, making it easier to save for them rather than having to come up with all the money at once or having to take a loan.
You just need to account for the expense in your budget, set the time frame (number of months) in which you want to make that purchase and divide that cost by the number of months. That is the amount that you need to set aside every month for your big purchase.
This amount should be taken as seriously as any other expense category that you save for. At the end of the saving period, you will be able to make that purchase without having to borrow money.
The purpose of a budget is also to give you a real sense of your spending capability on these kinds of high ticket purchases. It will give you an indication if you can afford that new car or if it makes more sense to go in for a used car till you can save up enough for a new one.
9. Identify and reduce wasteful spending
I can most certainly tell you that most people are overspending on things that can easily be identified and avoided with the help of a budget.
The habit of wasteful spending is a silent killer. We are all guilty of spending money on things that can easily be reduced or completely eliminated.
Buying expensive branded groceries, eating out, subscriptions to online streaming services, mobile app subscriptions, expensive gym memberships and many other such expenses can easily be reduced by opting for cheaper alternatives or better still, completely avoided.
Even essential expenses like electricity, mobile network plans, insurance, etc. can be drastically reduced by switching over to cheaper providers delivering the same quality of service.
These little tweaks to lifestyle and daily expenses can add up and end up saving you a significant amount of money at the end of the month. This money can be allocated to other, more important sections of your budget.
10. Improve your health
There’s another great importance of budgeting – your health. When you have a budget, you start to be aware of all the bad spending habits that you have and that not only affects your pocket but your body as well.
You will stop eating at any stall on the street, you start avoiding junk food, you avoid spending your money on parties, alcohol, cinemas, etc. and you cancel services like Netflix that keep you sedentary at home.
Instead, a budget will help you develop healthier (and easier on the pocket) habits like cooking at home, visiting natural parks, attending free activities or start exercising.
11. Reduce financial disagreements in relationships
Arguments and fights over money in relationships is a very serious problem and is cited as one of the top reasons for divorce in the US.
It’s a very valid topic of concern too. When two adults who are used to handling their own personal finances come together, there are bound to be some disagreements and conflicts between them regarding the control of their combined finances.
A budget is an important tool to avoid such uncomfortable differences in a relationship.
Budgeting requires both the individuals to be on the same page and take combined mutual money decisions rather than fight each other.
This keeps them focused on a larger common goal and build a life together.
As we can conclude from all the points above, budgeting primarily serves the purpose of helping you to improve and take control of your financial life.
A well planned out budget can drastically improve the way you handle your money and ensures that you always have enough of it for the most important things in life.
I can confidently say this – Budgeting will make your life better, trust me!
Do you follow a budget? What is the main purpose that it serves for you? Has it brought a significant change in your life? Let me know in the comments below, I would love to hear your thoughts!