This post may contain affiliate links. Please read my disclosure for more information.
Table of Contents
What is the purpose of a budget
8 Benefits of Budgeting Your Money
You hear it all the time… “You have to budget your money!” and many times there is no explanation so you’re left wondering “What is the purpose of a budget?“.
A budget is a financial plan that establishes the anticipated income and expenses for a set period of time, typically on a monthly basis for most personal and family budgets.
The purpose of a budget is to have control over your finances and not let your money get away from you. This way you can save more and spend less, so you have more to invest in the future.
A budget is an important piece of everyone’s finances. It can help you set goals, make decisions, and track your progress. And because budgets are so versatile, it doesn’t matter if you need to save up for a big purchase or just want to get ahead of the game for next year.
Whether you’re looking to spend less or want to set yourself up for success, there are all sorts of reasons why you need a budget.
Why You Need a Budget
A budget is essential for two reasons – it helps you to plan your money in advance and to make sure that you don’t spend more than what is available.
A budget can be made in order to keep track of your money, or in order to save more of it. It’s important to set up a budget for both reasons because when you know where your money is going, you can see when you’re spending too much and start saving more.
Types of Budgets
There are five main types of personal/family budgets. Keep reading to learn a bit about how they work and the advantages of using each type and the purpose of a budget for each type.
Zero Based Budget
A zero-based budget is a way of planning and spending money in which every expense is scrutinized and considered for elimination.
The main purpose of a budget that’s zero-based is that it forces people to be more realistic about their spending habits before they incur the expenses.
This type of budget will help you cut down on unnecessary spending by only buying what you need instead of making impulse purchases or stockpiling items that are not used most often.
The second type of budget is the balanced budget which has an equal balance between income and expenses in all twelve months and is balanced which means it doesn’t spend more than is earned.
A balanced personal budget is an integral part of financial planning. A well-balanced personal budget will allow you to spend your money in a controlled manner and help you to save for emergencies.
You should always have a plan for your income and expenses. It’s important that you have a clear idea of how much money you are spending each month so that you can set aside money for the future.
This will allow you to avoid any surprises in the future when bills come due or unexpected expenses arise.
Monthly Cash Flow
The third type of budget is the monthly cash flow where instead of balancing expenditures with income, it focuses on managing how much cash flows in and out each month.
A monthly cash flow personal budget is a great way to track your spending habits and make sure that you are not overspending.
This will allow you to see if there are any places where you can cut back on your spending. It will also give you insight into how much money is coming in and out of your account each month.
A 50/20/30 budget is where you spend 50% of your income on necessities, 20% on wants, and 30% on savings.
The 50% of your income is what you should be spending on necessities like shelter, food, clothing, etc.
The 20% that you spend on wants is for items that are not necessary but are things that make life more enjoyable like vacations or eating out.
The last 30% of your income should be going into your savings account or emergency fund for a rainy day.
Cash Envelope Budget
One’s income is then distributed among these categories as needed during the month according to a pre-determined spending plan.
The simplicity of the cash envelope budget concept has made it very popular with people who are new to personal finance, as well as those looking for a way to make their budgets more manageable, and it’s also been shown to be effective for those needing financial assistance.
How to Create a Budget & Maintain It
The key to maintaining a budget is to avoid impulse purchases, and instead go for items that we really need.
This means living below your means and not buying things just because we can afford them, but rather waiting until we have enough money for the item and then purchasing it.
This will help us save money and keep our finances in order.
A budget is the most important tool you will need in order to control your money. It can be created by following these steps:
1) Track all of the income that comes into your household
2) Track all of the money that goes out of your household (including credit cards, loans, etc.)
3) Subtract the amount spent from the amount earned to find out how much money you have left
4) Allocate this leftover money to different areas in order to appropriately budget for each expense
5) Repeat this process every month.
How to Track Your Budget
Once you have an idea of the type of budget you want to use to manage your money, you’ll want to find a way to track everything.
Luckily, there are many ways to track your budget to make it a whole lot easier to maintain.
Printable Budget Planner Templates
Budget planner printables are one of the most common ways to track your budget since are simple to use. They are a great choice for beginner budgets and there are many free budget printables that can be downloaded.
Using a budget spreadsheet is another great way to track your budget since all you have to do is input your expenses and everything is categorized and calculated automatically.
Automation makes tracking your spending easier than ever before. Budgeting apps help track expenses from linked card purchases so a lot of the expense tracking is done for you.
By using services like Mint or Personal Capital you can get an idea of where you might be overspending.
Benefits of Budgeting Your Money
Grow Your Savings
One major purpose of a budget helps you set your future goals and figure out how to attain them. It also helps you decide what is more important to spend money on, for example, your wants or needs.
A budget helps you save money by preventing you from overspending on wants. You can set a monthly or daily budget so that you don’t spend more than what you have allocated to yourself.
It doesn’t matter how much money is in your bank account, having a budget will help with saving money in the long run.
When setting up your monthly or weekly budget, it is important that it includes everything that is essential for living including rent, food, electricity bill, and water bill among other things as well as a set amount to add to your savings every month.
Cit Bank is currently the best option and my recommendation for your emergency savings.
- Currently, they the highest APY through their savings builder account.
- Have no opening or maintenance fees.
- Compound interest daily to maximize your earning potential.
- Only require a $100 minimum deposit to open an account.
Identify Wasteful Spending
The relationship between money and happiness is an interesting topic. People often think that spending more money will make them happier, but it is not always the case.
One of the most important life skills is to know how to manage your finances and spend less than you earn. This will help you avoid unnecessary debt, enjoy a higher quality of life, stop living from paycheck to paycheck, and be able to take care of yourself in the future.
Control Your Money
Budgeting is one of the best ways to control your money. If you are not budgeting, then you are not in control of your money.
The purpose of a budget is to know where your money is going so it can help you make better decisions with your money. Let’s say you want to buy a new TV. You might put it on your list and think about whether or not it is something you really need.
If you can’t afford to buy it now based on your budget, you can determine how long it’ll take to save up the money to be able to buy it without taking on any debt.
A budget can also help a person with a tight income plan out expenses and purchases in a more effective way so they don’t have any surprises at the end of the month when they have little left over for anything else!
Improve Your Net Worth
One big purpose of a budget is to improve your net worth. There are many definitions of personal net worth but the most basic definition is the difference between “the difference between what you own and what you owe” or assets vs liability.
Basically, if you sell all your assets would there be enough money to cover all your debts. It is important to reflect on this concept because it can help us get a better idea of our financial situation and how we can use it to our advantage.
Get Out Of Debt
Financial debt is not something any of us wants to be in, but it can happen. Budgeting is one of the most important tools for getting out of debt because without one you don’t know where your money goes.
You will find that you have a lot more money to put toward your debts if you cut unnecessary spending–like eating out every day, buying expensive clothes, or paying for unused subscriptions.
Once you know where your money is going, it’ll be much easier to change your behavior or cut back on unnecessary spending so you can apply more money to your debts in order to pay them off faster.
Reach Financial Goals
If you’re serious about reaching your financial goals this year, then it’s time for some serious budgeting. Let’s discuss some of the practical things that you can do in order to reach your financial goals with a budget.
First of all, it’s important that you create a detailed plan of what needs to happen for you to meet each goal before you set out to achieve them.
Once you know what’s needed to reach your financial goals, you can modify your budget to help you reach your financial goals faster.
In the end, it is not about how much you earn or what kind of investments you make. It is about how much you spend and what kind of lifestyle and living standards you want to achieve.
Reduce Financial Stress
Another purpose of a budget is a way to better manage your money by planning your spending and saving for the future. It’s also one of the most effective ways to reduce financial stress.
A budget helps you visualize where your money is going, what you’re spending it on, and how much is left over at the end of the month.
Some people use budgets to save money for big purchases or specific goals, like buying a house or saving for retirement. Others use it just to help them reduce their grocery bill each month.
The point of a budget is that it forces you to think about where your money goes each month so you can make changes if necessary.
A budget is a good tool to help you get control of your finances and avoid financial disaster. It helps you plan for your future and focus on what’s most important to you. A budget can help you feel more secure and confident about the money coming in and going out.
Improve Self Discipline
A budget is a way of exercising self-discipline. If you have a budget, you know what you can spend money on and what’s off-limits. It’s all about setting spending boundaries in order to save more.
With a budget, it will be easy to establish personal boundaries that are not only financially beneficial but also mentally healthy.
A budget will help keep your mental health in check but also give you more enjoyment out of life since it’s easier to save money when spending less.
Conclusion: The Purpose of a Budget is to Have an Honest Relationship With Money
Money is an emotional subject for many of us. It can make us feel scared, greedy, or lonely. The relationship we have with money is important because it influences the choices we make.
It is important, to be honest about how you feel about money in order to know what might be influencing your decisions. Learning how to change your relationship with money will help you make better decisions that are right for you.
Of course, you will run into budgeting challenges along the way and this is totally normal.
Related budgeting and money saving articles that’ll help you manage your money