What is the purpose of a budget?

So, what is the purpose of a budget? The purpose of a budget is to track income and spending, to reduce and/or eliminate debt, grow savings and wealth, to create a plan for spending for current and future purchases.  I like to create a yearly budget that then becomes my spending plan for the current year.  Using Excel, I use my spending plan to balance my checking account and track my spending.

Per interest.com 38% of Americans have not created a personal budget in at least 10 years or have never created one.  Also, about half (55%) of Americans are budgeting somewhat regularly (within the last 5 years) while the other half are not (45% at 5 years+).  Therefore, if your income and expenses never change and your spending is not excessive then for the 45% that took this survey, maybe a budget is not necessary.  However, I have learned that life happens and to always expect the unexpected. Here are 5 Basic purposes for a budget:

#1 Communication

A budget is a tool to communicate to you and others in your household how much income is coming in and how much income is going out.  How current money should be spent and how future income should be spent. It should be a household discussion with the heads of the household reviewing and discussing the current and future plans for the joint income.  Also, this is a great opportunity to share with age-appropriate children the virtues of budgeting and saving. Hence, one of the purposes of a budget is a communication tool that allows you to share how you will provide for yourself and your family.

#2 Coordination

A budget allows for a coordination of the funds to be allocated to a checking account to pay bills or deposited into savings accounts.  Wherever possible this should be automated. On-time payments are key to maintaining a good credit score.  And direct deposits into savings and investment accounts are key to growing wealth. To learn more about improving credit scores read How to raise your credit score 100 points in 45 days and to learn more about Wealth read Wealth Accumulation.

#3 Planning

Another purpose of a budget is to plan how you want to spend your money. How do you plan to save for special items and or big purchases? How do you plan to save for college and retirement?  When you plan and save you are less likely to go into debt.  Therefore, you are less likely to borrow and are more likely to live within your means. You are more likely to be financially sound.  Read Being Financially Sound for what this can look like for you. 

#4 Control

When you budget on purpose you will know exactly how much is going towards bills, pleasure, and your future.  That is because you are in control of how your money is being spent and saved.  You are telling your money how you want it to work for you.  A budget helps you control your spending because if it is not in the budget, you shouldn’t be spending.

#5 Evaluation

The final purpose of a budget is to evaluate how you are doing.  Are you on target? Have you overspent? Can you get back on target?  Do you need to trim some expenses?  Or have you been so good this is more money for a guilty pleasure or to save?  There is nothing wrong with rewarding oneself if you have been super good.

What Is The Purpose Of A Budget But to Set Goals

We all need to set some goals.  Whether it is to buy a home, a new car, or to save for college or retirement. Financial goals help to motivate us to make these goals happen. It can encourage you to go for a promotion, a raise, or a 2^nd job.  Or it can simply encourage you to give up something for something better for a short time. Such as an expensive coffee for a new pair of shoes. Financial goal setting is key to achieving all you were meant to be and own.

What Is The Purpose of a Budget But To Help You Get out of debt faster

Another purpose of a budget is to get out of debt.  There is nothing more freeing than saying goodbye to your lenders. Freeing up money and allowing you to have peace of mind.  Owing money requires having to work to pay off debt. It is like being a slave to the lender as I wrote about in a past blog.   Currently, 32% budget to get out of debt, and 88% of people who budget stay out of debt per debt.com. These are compelling statistics to have a budget.

What Is The Purpose of a Budget But To Increase Wealth And Savings

Many people budget to increase their wealth when wealth building is part of the budgeting process. Cited in  debt.com, 37% budget to increase wealth and savings.  Budgeting is an excellent tool for building wealth.  When you plan to be rich you can become rich.  You just have to let your money work for you through saving and investing.  Other than saving for an emergency fund you should consult a certified financial planner for investment options to grow your wealth.

What is the Purpose of a Budget But To Plan how to spend

65% of Americans Have No Idea How Much They Spent Last Month per mint.intuit.com. A budget would help you avoid this because you will have allocated every dollar to a specific line item.  Be it entertainment, gifts, etc.  The purpose of a budget is to have a purpose for every single dollar you earn. 62% save throughout the year for special events and holidays per debt.com. No holiday or special occasion should catch you off guard because you have purposely planned for this event. Yes, unexpected events can happen, but guess what you budgeted for an emergency fund for that.  To learn more about budgeting for an emergency fund read my blog Emergency Fund Savings.

The Purpose Of A Budget Is To Provide Peace And Financial Freedom

There is peace of mind knowing that your budget is working to make your life better.  To provide freedom from debt so that you can live your best life.  A budget is not a tool to restrict your spending but to help you spend better and more wisely.  A budget can help you eliminate waste and from making an unaffordable purchase.  It helps you live within your means and avoid debt. The budget allows you to spend freely without worry about how you plan to pay for something because you already know. It is in the budget and the budget is doing what it does on purpose.

Your budget Your Future

Create a Budget. Start as early as you can.  And if you are new to budgeting it is never too late to learn how to budget on purpose.  Attached is a worksheet you can use to get you started. If you prefer a digital option, I recommend the EveryDollar.com (Free), YNAB (Fee), Pocket Guard (Free), Clarity Money (Free), or Good Budget (Free) Apps to help you budget.  Your financial future depends on you to plan how every dollar you earn having a budgeted purpose.

Additional Reading

Setting Up A Budget For Beginners

Mind Over Money Budget

Let’s Budget, Spend, and Live!

Sabrina