What is the Purpose of a budget blog by BudgetingFaithfully.com

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. It allows you 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 first create a master budget with income and expenses. I then create a spending plan to balance my checking account and track my spending.  I use this to track actual vs. budgeted numbers to stay on budget.

Per NerdWallet.com 84% of Americans have created a monthly budget.  However, 83% to 84% of Americans either overspend or exceed their budget.  44% are using credit cards when they go over their budget.  It appears that most Americans know how much money they have available to spend but are not following the budgets that they have created.  However, I have learned that life happens and to always expect the unexpected. My budget has always been instrumental in keeping me on track for my financial goals. Here are 5 Basic purposes for a budget:

#1 Communication

The main purpose of a budget is to use it as a tool to communicate to you or 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. It could be their first introduction to personal finances.

The entire budgeting process should be used as a communication tool. It should be used to communicate short-term and long-term goals for the year. Everyone should have input on how all the funds should be used concerning cash flow. This is the time to communicate why certain items may have to wait to be purchased as the cash has to be available. This is one way to avoid over-extending yourself this year. Some purchases may have to wait until next year to avoid overspending. 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. Begin working on your budget within the first week of the new year. This is the time to make specific goals and follow through.

#2 Coordination

A budget allows for the coordination of the funds to be allocated to paying bills and deposited into savings accounts.  The first step is to set up automated payments and deposits whenever possible. Paying bills on time is the key to maintaining a good credit score.  Hence, the same as direct deposits into savings and investment accounts are key to growing wealth. An automated system will not only help your credit score and increase savings, it will save you tons of time.  You will only have to make sure that you have enough funds available to cover the expenses.  However, you will always know because you will have a budget that tells you. 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.

This is also the time to coordinate your budgeting style with those in your family. There are different types of budgets. Let’s review a Traditional Budget, 50/30/20 Budget, Zero-based Budget, Goal-Based Budget, Envelope System Budget, and the Pay Yourself First Budget:

Traditional Budget

This is a basic budget that takes all your income and subtracts expenses, savings, and investments.  The remaining funds can be used for fun, additional savings, or additional payments to pay down debt faster.

50/30/20 Budget

This budget uses percentages to create a budget. Fifty percent of your money should be spent on household bills, groceries, and necessities.

Thirty Percent is used for fun things like streaming services, subscriptions, dining out, hobbies, and any other fun thing. This is your personal money or discretionary income.

Twenty percent of your money should go towards debt and savings. This is designed as extra money to get out of debt faster or to help you reach your savings goals.

Zero-Based Budget

This budget is designed to allocate every cent of your income until you reach zero. It is designed to give every dollar a job. This zero-based budgeting process works primarily with budget categories during the planning process.

Goal Based Budget

The main purpose of this type of budget will be based on achieving one or more goals. With most of your resources earmarked to obtain a savings goal, retirement goal, or a get-out-of-debt goal.  It might look like the following:

  • Save 10% of my income.
  • Invest 15% of my income for retirement.
  • Add $100 additional funds each month to my credit card balances.
  • Spend no more than $5,000 on vacation.
  • Spend no more than $1,000 on Christmas presents this year.

This is a very flexible budget that allows you to use the remainder of your cash as you so desire.

Envelope System

This is a cash-based budget and was one of the first budgets.  Way before the electronic banking era.  Some people still use this form of budgeting. For instance, you use actual cash to pay expenses.  Each envelope is labeled by the expense and the amount of money allocated to that expense. You then only use what is in the envelope for that expense.  For example, if the grocery store envelope is allocated $850 for food, this is all the available cash you have to spend.

Pay Yourself First Budget

This budget prioritizes you and your financial goals first.  This is primarily done by taking deductions from your paycheck before the net amount is deposited into your checking account. Hence, a set amount of funds might be sent directly to your savings account or investment account.  The balance of your paycheck would then be allocated to your bills and expenses.  This budget works best for those who find it difficult to save and invest. This is a great budget when you need to save for large purchases and want to ensure that the monies are being saved. You will not have to remember to do it. Thereby, you are guaranteed to get it done.

#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 apt to be financially sound.  Read Being Financially Sound for what this can look like for you. 

When you create a realistic budget to live by you have a genuine plan for your money. Planning helps to keep your financial situation on target.  It helps you to stay focused and purposely spend your money. It allows you to prioritize the most important things in your life, such as education, retirement, and emergencies. Hence, when you have a plan you feel like you have some control over your life.

#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. It allows you to be prepared for unexpected events because you will have an emergency fund that you have been building over time. Therefore, when you follow your budget you have control over your spending. You have control over your financial life. Therefore, more money can go towards building your net worth from savings and investments.

#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.

As the year progresses, you should be reviewing your actual results.  It is always a good idea to make sure you evaluate your progress. This will allow you to take corrective actions should you find that you may have overspent in some areas of your budget. There are simple steps you can take to get back on target. Redo, your budget. Reduce spending in areas that you have overspent.  Try to cut back on other expenses in your budget. However, if you strayed too far off budget use some of your emergency funds to get you back on track. Try to do this as a last resort.

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. Writing down financial goals helps to motivate us to make these goals happen. It can encourage you to go for a promotion, a raise, or obtain a second job.  Or it can simply encourage you to give up something for something better in the long run. Such as giving up expensive coffee to save for a new pair of shoes. Financial goal setting is key to achieving all you were meant to be and own.

The best way to set goals is to look at where you are today and determine where you want to be tomorrow. This could mean retiring comfortably. It could mean saving for your dream home or car.  Finally, it could mean relieving some financial stress by getting out of debt.

What Is The Purpose Of A Budget But To Help You Get Out Of Debt

Another purpose of budgeting 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 primarily to pay off debt. It is like being a slave to the lender as I wrote about in a past blog.  Currently, only 23% budget to get out of debt. While 87% of people polled said budgeting has helped them “get out or stay out of debt.” per debt.com. These are compelling statistics for having a budget.

What Is The Purpose Of A Budget But To Increase Wealth And Savings

Budgeting is an excellent tool for building wealth.  Budgeting allows you to live within your means. Therefore, you can develop a spending plan that will allow you to improve your financial health. A budget gives you a full view of how much money you have to spend and how much to spend. Financial planning is the key to building up wealth because you are more likely to pay down debt, save, and invest in your future.

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, or an unforeseen emergency, etc.  The purpose of a budget is to have a purpose for every single dollar you earn. Therefore, 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.

What Is 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.  Therefore, it helps you live within your means and avoid debt. The budget allows you to spend freely without worrying 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)Marcus, or Good Budget (Free) Apps to help you budget.  Your financial future depends on you to plan how every dollar you earn has a budgeted purpose. A budget is an important tool for your financial plan.

Recap

The enormous benefits of budgeting cannot be ignored The budget process is key to financial success and all your financial problems. Here is a list of the benefits.

  • It builds wealth and a net worth.
  • It can eliminate or reduce debt.
  • It helps you live within your means.
  • It helps you build an emergency fund.
  • It builds savings to avoid debt.
  • It generates income.
  • It will allow you to invest in your future.
  • To ensure you have enough money in retirement.

This content is for information purposes only.  I do not endorse any of the companies mentioned.  Please research and do your due diligence. Also, I do not get paid if you click any of the links.

Additional Reading

Setting Up A Budget For Beginners

Mind Over Money Budget

How To Raise Your Credit Score to 700 in 90 days

Everyone also to whom God has given wealth and possessions and power to enjoy them, and to accept his lot and rejoice in his toil—this is the gift of God.

Ecclesiastes 5:19 ESV

39 thoughts on “What is the purpose of a budget?”

    1. sabrinaanthony.media

      It is a struggle for most of us. You got this. Wishing you all the best. Thanks for sharing.

    1. sabrinaanthony.media

      Glad you are budgeting. As long as you understand it. That’s all that counts. LOL Thanks for sharing.

  1. Great tips here. I think evaluation is such a great step that may get overlooked. It’s important to look back and recognize if the budget has been realistic or not!

    1. sabrinaanthony.media

      I couldn’t agree more. This will allow you to see where you are and how you can move forward. Thanks for sharing.

  2. Our pastor was just speaking on budgeting yesterday. I’ve had a budget for many years and follow it pretty closely, and boy has it helped!! It’s allowed me to give more away as well!

    1. sabrinaanthony.media

      When we are good stewards of our finances we can give more. May God continue to bless you. Thanks for sharing.

  3. Budgeting is so important for everyone and I started my children at around 10 years old with allowance and things they wanted to buy! Today as adults they all budget.. and stick to it!

  4. Our budget gives us the freedom to not have to worry about money. We always know where we stand and whether we can afford a purchase. My husband always laughs when he asks if we have the money for something he wants and I respond “yes, I already put it in the budget.”

    1. sabrinaanthony.media

      You are absolutely correct. Budgeting is freedom. Financial freedom. Love “yes, I already put it in the budget”.

  5. Oh man I am so not a budgeter. I kind of want to be but I don’t know if my spirit has it in me haha. I’m not a big spender so that helps I guess

    1. sabrinaanthony.media

      Yes, controlling your spending is key to budgeting. Change your mind and your spirit will follow. You will enjoy the freedom.

  6. I have always really appreciated that a budget does not take control away. It GIVES control and permission. I love having a budget now that I have refined mine over several years. At first, it can feel restrictive. But that changes quickly.

    1. sabrinaanthony.media

      Yes, a budget is more freeing than restrictive. Financial freedom is one of the best types of freedom. No longer a slave to your lenders. Thanks for sharing.

  7. Elizabeth Preble

    Great tips! A budget definitely gives you freedom and it’s a great way to plan for the future!

  8. I am truly lucky that my Mom drilled money management into my head as a young girl. I have never really had trouble budgeting for something I want or need… which really bodes well considering my travel addiction!!

  9. Budgeting is so helpful and we usually sit down and recalibrate once a year. I am not always the best at following through with checking if we are staying on budget though! 🙂

  10. Coming from poverty, budgeting wasn’t a thing because there wasn’t anything to budget. I had to sit and learn and discipline myself to budget when my career begun and I’m glad I did.

  11. The piece about a budget being communication really resonated with me. I think to this point I have always thought of a budget as an arduous task to get done and never really enjoyed so I never stick with it. But if you think of a budget as communication or a conversation between you and your money, then it doesn’t seem so task/checklist item type of thing and like more of a relationship. I like it. Thanks for that!

    1. sabrinaanthony.media

      A budget is the best form of communication for staying focus. It is an excellent tool for when you have trouble having a talk with yourself or your family about spending. Thanks for sharing.

  12. I love your app suggestions, and am looking forward to giving some a try. I use notes in my phone for our family budget. Very scientific lol

    1. sabrinaanthony.media

      Most of them are free so try each one until you find the one that works best for you. Glad I could help.

  13. Budgeting is so important if you want to control your finances and I don’t understand why more people don’t do them. Without one you are blind to your debts and will always find it difficult to get on top of them. With a budget acting like a map you can at least keep yourself on track to sort your finances.

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