What is the Purpose of a Budget? (5 Reasons You Need One)
When it comes to managing your finances, having a budget is essential. But what is the purpose of a budget? Why is it so important?
A budget allows you to track your income and expenses, helps you save money, makes it easier to pay your bills, prepares you for unexpected expenses, and gives you peace of mind.
Let’s take a closer look at each of these purposes of budgeting – and how they can benefit you.
Purpose 1: Track income and expenses
One of the benefits of budgeting is that it can help you track your income and expenses. This can be helpful in a number of ways.
First, it can help you to see where your money is going and whether you are spending more than you are bringing in. This can be a valuable exercise in itself, as it can help you to make adjustments to ensure that your spending does not exceed your income.
Second, tracking your income and expenses can also help you to identify trends over time. This information can be used to make decisions about where to allocate your resources in the future.
For example, let’s say you track how much your family is spending on takeout, and notice the amount has been creeping up over time. That gives you a signal that it’s time to re-evaluate that line in your budget. Do you need to allocate more to takeout? Do you need to cook at home more using cheaper foods? Do you need to meal plan so you ensure you’ve got the groceries for preparing food?
There’s no right answer, but it’s important to make an informed decision on these.
Finally, knowing where your money is going can also help you to assess your progress towards financial goals. For example, if you are saving for a down payment on a house, tracking your income and expenses can give you a better sense of how much you have available to save for that goal – and then track if you do meet those savings goals.
Purpose 2: Helps you save money
For many people, budgeting can seem like a tedious and restrictive exercise. However, the truth is that budgeting can be freeing! (Check out our motivational quotes about budgeting if you need extra inspiration in this area).
This is because it’s a powerful tool for both purposeful spending and intentional savings.
By tracking your income and expenses, you can quickly identify areas where you are overspending. This knowledge can then be used to make adjustments to your spending habits to allow you to save more money.
For example, if you find that your gas bill is super high in the winter, you could try tossing on a sweatshirt at home and keeping the thermostat a little lower. If you find that you are spending too much on clothing, perhaps you can shop the sales, utilize thrift stores, or just make do with what you have already.
Yes, these seem like small changes – but they can really add up over time.
Additionally, budgeting can help you make informed decisions about major purchases. Try considering the cost of an item in relation to the number of hours you need to work to pay for it (and thus the hours of your life lost towards that purchase). This can help you can avoid making impulse buys that you cannot afford, saving more money over time.
Lastly, budgeting prepares you for contributing defined amounts to your savings and investments – whether that’s 60% of your income (in the case of a 60-30-10 budget), 30% of your income (in the case of a 30-30-30-10 budget), or simply aiming for a monetary amount like $100 per month.
Purpose 3: Makes it Easier to Pay Bills
Do you feel overwhelmed when all those bills start popping up in your email inbox or in your mailbox? Is it tough to know if you’ll have enough to pay all your bills?
Budgeting is a must-do for this reason. You can outline all your bills and compare that to your income. You should also list all the due dates so you can make sure they’re being paid on time to avoid late penalties. (This is particularly important if you don’t have enough of a cushion in your bank account to set up autopayments yet).
If you’ve got enough income to cover your bills, that’s great! Now you can start to outline more of your discretionary spending, like food, clothes, and entertainment.
If you don’t have enough money to cover your bills, you have two choices – eliminate or reduce the bill, or make more money. Eliminating a bill might be cutting cable completely, while reducing a bill might mean switching from your current cell phone provider to a low-cost carrier. Or you can generate more income – think asking for a raise, getting a second job, or starting a side hustle.
In addition to these benefits, budgeting can also help you manage irregular bills. For example, you may have a car insurance or homeowner’s insurance bill that comes once a year. It’s easy to forget about these.
You can create your budget to address this. Allocate some of your money into a separate savings account for these bills, so that you’re prepared to pay for them in full when they are due.
Purpose 4: Prepares You for Unexpected Expenses
Another purpose of budgeting is that it can help you to prepare for unexpected expenses. As we all know, life is unpredictable and there will always be surprises.
If you haven’t created an emergency fund yet, prepare your budget so that you start saving small amounts to go towards it. An emergency fund is a savings account that you can use to cover unexpected costs, such as medical bills or car repairs.
Our emergency fund came in handy this year when we had a big leak in our upstairs bathroom. Even though insurance was great for this scenario, we still had to pay our deductible, and were grateful that we could cash flow that.
This fund is also key to have in the event of job loss. You want to be able to cover basic expenses in this scenario while you’re job hunting.
Ideally, you should aim to save enough money to cover at least 3-6 months of living expenses. If you have an unpredictable income or are self-employed, it’s probably wise to lean towards the later end of this range or even a little more. This will ensure that you have the resources you need to deal with most rough patches.
Purpose 5: Gives You Peace of Mind
Finally, budgeting can give you peace of mind. This is because it can help you to feel in control of your finances and less stressed about money.
When you have a budget, you know exactly where your money is going and what your financial priorities are. This can help you to feel more confident about your ability to meet your financial goals.
Particularly if you have a values-based budget, you also feel empowered to spend your money on the activities and expenses that mean the most to you. Spending money isn’t necessarily a bad thing; it can feel good to spend extra money we make based on our values (while simultaneously saving for long-term goals).
Lastly, budgeting helps you avoid difficult financial situations, such as being unable to pay your bills or going into debt. There is no doubt that avoiding these situations will mean less stress and more calm in your life.
The Bottom Line
Budgeting is a valuable tool that can help you save money, make better financial decisions, and prepare for the unexpected. If you are not currently budgeting, now is the perfect time to start! While there are lots of different budgeting methods out there, one of the easiest ways to get started is to simply list your income and your average expenses over the last few months – and set goals from there. You’ve got this!
Share: Do you budget? Do you find it helps you?