Budgeting is one of the single most effective tools for money management. A budget is an estimation—or best guess—of what your income and expenses will be over a set timeframe. Budgets can span a week, month, quarter—three months—or any set length of time. They are created by individuals and businesses.
Motivational speaker and author John Maxwell once said, "A budget is telling your money where to go instead of wondering where it went."
Know What You Buy
Before you sit down to make a budget, you might not be aware of how many different types of things you need to buy.
Most people are aware of the items that cause them to take out their wallets on a daily or weekly basis: groceries, gasoline, coffees at Starbucks, restaurant meals with friends.
But many people are unaware of the items that they only pay for once or twice a year, such as holiday gifts, charitable donations, and car insurance.
The awareness weakens, even more, when it comes to items that we only pay for at random intervals, such as fixing our roof, replacing the dishwasher, putting new tires on the car, or paying an expensive veterinarian bill.
A budget helps you become aware of all of these different types of expenses. Worksheets will help by listing the many expenses that creep up over time.
Set Your Priorities
Budgeting is the art of aligning your spending with your priorities. That's why there's no single "best" way to design your budget; everyone's priorities are different. Creating a budget can help you articulate those priorities. Typical priorities include:
- Planning and paying for educational expenses
- Saving a down payment to buy a home or paying off the mortgage early
- Paying off high-interest student loans and credit card bills
- Renovation of a home
- Vacation or luxury expenses
You can't purchase everything. Every decision requires a trade-off. Creating a budget helps you think more deeply about which trade-offs you're willing to make.
It can be hard to be on the same financial page as your spouse. Perhaps you and your spouse have different priorities. If your children are old enough to have a voice in household financial matters, it's even harder to get everybody on the same page.
Creating a budget can help you, your spouse, your children, and any other interested parties have a starting point for a discussion about the financial choices you'll make.
These conversations will allow you to make compromises and decisions about the financial road your family will take. Your budget will then become your "action plan" for achieving these goals.
Reach Your Goals Faster
Just when you've made some headway with your savings, some sudden event pushes you back to square one. Your car breaks down. Your kid throws a baseball through a window. You need to get your wisdom teeth pulled out, and insurance will not cover the bill.
A budget can help you plan for these inevitable items by establishing and slowly building an emergency fund. It can also help you get ahead in spite of these surprise expenses.
You Control Your Budget
A lot of people tend to overlook the benefits of having a budget because they're worried that they'll be too restricted by one.
Just remember: you control your budget, your budget doesn't control you. It helps you gain control over your money and allows you to live a more fulfilling life. Isn't it time you put your money where it counts? Your budget can guide you there.