What Is The Purpose Of A Budget?(And How Can It Help You?)
You know what they should have taught us in school? What is the purpose of a budget?
I think it’s great I know how many apples Mary has after giving 10 away and how to find the sum of ???? in a diagram but I would have really preferred learning the purpose of a budget, how to make one and how it can help me in life.
Truthfully, budgeting is an important aspect to your financial health and although it may not be glamorous, it is well worth your time.
If you want to learn how to budget, then keep on reading.
Here’s what we’ll cover:
- What is a budget
- What is the purpose of a budget
- The importance of a family budget
- Reasons why you should budget
- How to create a budget
- Where to find free budget templates
Some of the links on here are affiliate links and I may earn if you click on them, AT NO EXTRA cost to you. Hope you find the information here useful! Thanks.
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What is a Budget?
Before we address the question, “what is the purpose of a budget?” Let’s first have a look at what a budget is.
A budget is essentially a financial plan for a defined period. It’s an estimate or forecast of your income and future expenditures for the next month, year, or the date of the financial goal you want to reach.
Creating a spending plan or budget allows you to get an idea of what to expect financially in the coming months and factor in how much money you’ll have for that period.
What is the Purpose of a Budget?
And now we answer the question, “what is the purpose of a budget?”
Well, dear readers, the purpose of a budget is to plan, track, manage, and improve your financial health.
If you have long-term financial goals, having a budget is a great way to stay on course. The main purpose of a budget is to help you:
- prioritize your finances,
- control your spending and
- consistently put yourself first with savings and investments.
Importance of a Family Budget?
If the main purpose of a budget is to plan, track, manage, and improve your financial health, why is it so important?
How can a family benefit from creating a budget?
Believe it or not, creating a budget won’t just keep you on top of your finances. It prepares you financially for the dreaded unplanned surprises that could cost you money and it will keep your family together.
Did you know that having financial problems is one of the leading causes of divorce?
Arguments over finances are a very real problem and can often lead to conflict. The subject of money is already difficult but when you put two people who have been handling their finances alone for most of their adult life and then have to combine their finances, there’s bound to be a heated discussion or disagreements.
A budget can eliminate financial insecurities because it lays everything out in detail and forces you to get on the same page in order to plan your future.
Budgeting keeps you in control, holds you accountable, and keeps you in focus.
Have I convinced you to start budgeting yet? If the answer is no, then keep on reading because there are a whole slew of reasons why you should be jumping on this budget wagon.
Why you Should Budget:
- Watch your savings grow
- Control your finances
- Identify wasteful expenditures
- Let your net worth grow
- Reach financial goals faster
- Reduce financial stress
- Get yourself out of debt faster
- Improve self-discipline
1.Watch Your Savings Grow
A budget is essentially a financial game plan and if your goal is to increase your savings or set up an emergency fund, budgeting can help you reach your goal.
If you’ve been trying to save money but are struggling to meet your savings target in a timely manner, then consider creating a budget to help identify:
- where your money is going and
- how you can better spend it to achieve your financial goals
There’s no room to hide with a budget and creating one can be eye opening.
Maybe you never realized how much you were spending on groceries or how much a cup of gourmet coffee amounts to at the end of the month.
For example, when I did a budget, I discovered I spent an unnatural amount of money on chocolate and iced tea. They were little amounts every time but they all added up to a big amount at the end of the month!
By identifying these costs, you can prioritize your savings goal and pay yourself first.
Don’t save what you have at the end of the month, in fact, the first thing you should do when you get your paycheck is deposit the amount into your savings immediately.
This is called ‘paying yourself first’.
This places a higher priority on saving money and ensures you’ll meet your target.
2.Control Your Finances
Being out of control isn’t fun and budgeting helps you regain control of your finances.
I don’t know about you but I don’t have the luxury of swimming in a pool of cash. With technological advancements, our society has grown accustomed to cashless payments and although that provides convenience, it has its drawbacks.
It makes it easier to make impulse purchases and because you don’t immediately see the amount of money in your hands, it seems less tangible and easier to lose track of.
Budgeting keeps you in check and allows you to allocate your expenditures responsibly -it puts you in control of your finances and gives you the power to direct your money wherever you see fit.
3.Identify Wasteful Expenditures
When you create a budget, you have to go over your finances and do the math, right? This forces you to look at your spending history and habits, which for some can bring up many surprising financial leaks.
Creating a budget will help you identify the cracks in your spending habits and eliminate wasteful spending.
When you start going over your finances, you’ll be amazed how much you can save and how much money you’re wasting day-to-day on wasteful expenditures.
Like for me, it was lemon cordial, so now I just buy lemons an use it in my cooking and in my water too 🙂
4.Let Your Net Worth Grow
If you stick to your budget and control your spending, you can save a lot of money and avoid living paycheck to paycheck.
When you plan, monitor and understand your spending habits better, your net worth increases.
For instance, you can allocate a certain amount to investments and let your money work for you or create a budgeting plan to strategize how to pay off your debt.
This will improve your credit score and net worth.
5.Reach Financial Goals Faster
Having a financial goal without a plan downgrades that goal to a dream.
When you create a budget, you’re essentially developing a plan to achieve those goals. You can look at your total amount for the month and see what’s realistic to save and plan how long it would take for you to reach your financial target.
6.Reduce Financial Stress
We talked about regaining control of your financial health through budgeting earlier and aside from the many benefits I’ve already listed above, creating a budget will help ease those financial worries you have.
Maybe you’re worried you don’t have enough for the month to pay off your loans, rent, afford groceries or you’re stressed about living paycheck to paycheck.
Having a concrete plan will put your mind at ease because everything is laid out for you to see.
Think about it, if you create a plan each month, you’ll know exactly how much you have, where you’re going to spend it and this will eliminate the financial insecurity and the element of surprise.
7.Get Yourself Out Of Debt Faster
Debt is a liability and a leech that feeds off of your financial health.
We all want to be debt free but sometimes it seems close to impossible. If you aren’t on a budget, you may not be aware of how much money you’re losing each month on debt.
Maybe you know roughly how much you’re paying towards your debt but have you added the total and seen the actual sum?
This can be a wake up call and give you the motivation to prioritize your payment strategy and keep you out of debt.
Sticking with a budget takes self-discipline and maybe you’ll find yourself struggling to keep with it.
But if you keep to the plan you created and are committed to it, you don’t just achieve better financial health, but you also cultivate an improved sense of self-discipline.
I love the feeling of seeing my progress grow and my plans on course and the best thing about a budget is that you see results!
It’s a self reinforcing process and the more results you see, the more driven and motivated you are to stick with your budgeting plan.
How to Create a Budget?
Now we know the purpose of a budget but the next question is how do you create one?
What’s a budget template and why do you need it? Fret not, dear reader -I will walk you through the basics of creating a budget template.
Use a Budget Template
First things first, what is a budget template and why do you need it?
Let’s recap: the purpose of a budget is to do what?
Keep your finances organized, planned, and to keep track of them.
A budget template is a document that will help you track your monthly income and your monthly expenses accurately.
It details every expense, income and shows you exactly where your money will go.
How do you Create a Budget Template?
Time for the main event -we’ve been going on and on about the importance and benefits of a budget but how does one go about creating a budget template?
With these simple steps:
- Gather your financial history
- Calculate your income
- List your monthly expenses
- Fixed and variable costs
- Total your income and expenses
- Make adjustments to your spending
1. Gather Your Financial History
The first step to creating a budget is to get an overview of your expenditures. How do you do that?
Gather every piece of your financial history in the last 3-6 months and have a look at your spending habits. You’re looking to gather:
- Bank statements
- Investment accounts
- Utility bills
- Credit card bills
- Receipts from the last 3-6 months
- Mortgage statements
- Loan statements
And anything else you can dig up. The goal is to get a clear picture of what you’re spending and where you’re spending it on a monthly average.
2. Calculate Your Income
After step one, you’ll have an idea of how much you’re spending each month.
Now it’s time to calculate your income -if you have a fixed income with tax deductibles, then this step will be easier.
However, if you’re self employed, then step one should have given you an idea of how much you make and how much income you can expect in the next month.
3. List Your Monthly Expenses
You have an amount you’re able to spend each month but where is it going and how much of it will you be left with in the end -if any?
This step is straight-forward and will help you understand where your money goes.
Use bank statements, receipts, and credit card statements from the last 3-6 months to get a clear picture of your expenses and list down all the expenses you expect to spend in a month.
4. Fixed and Variable Costs
Step four takes step three to another level. You now know where your money goes but now you have to divide them into two categories:
- Fixed expenses
- Variable expenses
Fixed expenses are mandatory costs that you pay each month and are the same amount each time.
Variable expenses are costs that vary from time to time, like groceries, entertainment, eating out, gifts, etc.
Start with your fixed expenses and assign an amount to each category. Then, estimate how much you’ll need to have each month for variable expenses.
Tip: Rounding up is better than rounding down. It’s always better to assume the costs are higher and be prepared for them.
4. Total Your Income and Expenses
This can end up two ways:
- Ideal situation: Your income is higher than your expenses.
- Not ideal: Your expenses are higher than your income.
If your income is higher than your expenses, you can put money towards areas of your budget such as, savings, emergency fund, retirement, or paying off your debt.
But if your expenses are higher than your income, it’s time for step five.
5. Make Adjustments to Your Spending
So your expenses are higher than your income -this means you’ll need to make some changes to your budget and cut costs to limit overspending.
You can do this by looking at your variable expenses and find costs you can cut.
Maybe the cost of eating out is unsustainable or you’re spending more on your gym membership than you’d care to admit.
These are examples of costs you can eliminate from your budget.
The purpose of a budget is to keep you on track financially and if you’re looking for a more in-depth guide to creating a budget that will do that for you -i.e. with all the math laid out, this article will explicitly explain how to create a monthly budget and more.
Free Budget Templates
If you’re not sure how to create a budget template or you want to save some time, then you’re in luck -I’ve compiled a list of free budget templates for your convenience:
Microsoft Excel can be a pain on its own and if you’re not an expert then creating a budget on excel can seem like an enormously frustrating task.
Microsoft has heard our grunts, groans and screams of frustration and has come out with a variety of free budgeting templates to fit all of our budgeting needs.
- personal family budgets
- monthly budget templates
- holiday budget templates, budget calculators, and even
- wedding budget trackers,
are available to download for free on their website.
“When you’re on top of your money, life is good. We help you effortlessly manage your
finances in one place. The more accounts you link, the more we can do for you.”
This is Mint’s company’s slogan. Mint doesn’t just offer free templates, the app advises and gives tools to help you make smart financial decisions.
Mint brings all your accounts and finances in one place so you can see your total balances.
Mint also automatically updates and categorizes your information -bank accounts and credit cards, to retirement accounts and more. If you’re looking for someone to crunch the numbers for you, they’ll do that.
They even help you manage your money and find savings gaps for you. They analyze the data and make recommendations that could help save you the most based on your lifestyle and goals.
You can sign up for free at this link and find free templates here:
Looking for a simple budget planner? Personal Capital is a great online budgeting tool that is completely free and helps you track your monthly and even yearly finances.
For you youngsters that are keen on saving up for retirement, Personal Capital has a specialized tool to help you assess your chances of retirement success based on your current financial situation and goals.
You can even enter hypothetical scenarios and integrate one of them into your new financial plan.
Every Dollar is a budgeting website that helps you create a monthly budget so you can achieve your money goals.
It also offers printables and is available as a mobile app, making budgeting easier and more accessible. You can sign up for free and get started by adding you monthly income, planning your expenses and tracking your spending.
No longer will you be asking “What is the purpose of a budget?”
After reading this article, you will not only know the purpose of budget but you’ll also be able to name the benefit of budgeting, how to create a personalized plan and find websites that already have budget templates that you can use for free.
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