You’ve likely heard it a million times; you need a budget! But why is budgeting important? Can’t you just make sure your bills are paid and call it a day?
While that tactic might work temporarily, it’s not a long-term solution and won’t help you improve your financial health. Learn why creating a personal budget plan is essential to help you reach your financial goals.
Table of Contents
Why Is Budgeting Important?
An adequately prepared budget helps you track your income and expenses. It enables you to understand where you’re spending money, what bills you must pay, and if you have any extra money to save or spend.
What Does a Budget Show You?
A budget shows you a comparison of your income to expenses. Think of it like a roadmap for your money. You can see how much money you have to cover fixed and living expenses and how much you can save or spend monthly.
What Is the Purpose of a Financial Budget?
The purpose of creating a monthly budgeting is two-fold. It helps you learn how much money you bring in and enables you to learn how to use your money correctly, including the following.
Learn to Budget To Save Money for Emergencies
Saving money for emergencies is essential for everyone. Life happens in the blink of an eye, and you should always be prepared financially.
As you’re budgeting to save money know that the ideal emergency fund has three to six months of expenses, but any money you save can help. Consider starting with a smaller budget, working up to six months of expenses.
The goal is to have enough money saved to pay bills and living expenses for several months if you cannot work due to unforeseen circumstances.
Learn How To Spend Money the Right Way (Avoid Debt)
Creating a budget plan helps you see how much money you spend. It can be eye-opening when you start a budget and see how you spend money. Your money budget should include individual budget categories to learn where you overspend and might need to cut back.
With a basic budget, you can also avoid using credit cards. Knowing how much you have to spend will make you more aware when you swipe your credit card without thinking, racking up unnecessary credit card debt.
If you are in debt, building a budget can help you learn how to pay it off. You can set aside money to put towards the debt each month, and if you follow your new budgeting plan closely, you may avoid increasing your debt.
Set and Reach Budgeting Goals
Budgeting goals are essential for personal budgeting plans and should include short-term and long-term financial goals. Shorter-term goals may consist of buying a car, paying for a vacation, or getting out of debt. Long-term goals may include purchasing a house, starting a business, or saving money for retirement funds.
What Are the Benefits of a Budget?
There are so many benefits of budgeting when done properly, here are a few of the most important:
- You’ll be more organized with money – A budget is like a picture, displaying your spending habits and progress toward financial goals. Knowing where you stand may make it easier to make critical financial decisions.
- You can plan for the future – Money budgeting should your progress toward short and long-term goals. Seeing that you’re on the right path can be motivating and help you save more money.
- Budgeting planning keeps you accountable – Knowing you need $x for your bills, savings, and debt payoff can keep you more accountable. You may spend less unnecessary money and have more money left to fund your future.
- You know what to budget for – Having a list of your monthly bills, spending plan, and living expenses helps you understand how to budget money and ensure you cover your bases.
Learn How to Create a Budget
So now that you know the importance of budgeting, here are the steps to learn how to create a budget plan.
Track Your Expenses
Pull your bank and credit card statements from the last year to track and categorize your fixed bills and other expenses, such as groceries, healthcare, childcare, entertainment, gas, and unplanned expenses.
Track Your Income
To pay your expenses, you need income. Looking at your bank statements, determine how much money you bring home annually and monthly. This will help you learn how to budget money. Your income should exceed your expenses; if it doesn’t, it’s time to cut back.
Name Your Financial Goals
Determine your financial goals, both short and long-term, and how much money you need to reach each goal. Your goals should include a timeline for achieving them and a breakdown of how much you should save monthly to make them happen.
Include Money for an Emergency Fund
Every month you should save money toward your emergency fund until it’s fully funded. Make this a fixed expense so you don’t overlook it and spend the money instead.
Create a Monthly Budget
With all the essential information, you can create a monthly budget using a budgeting app, spreadsheet, or pen and paper. It doesn’t matter what you use as long as it’s a method you’re comfortable with and will use consistently.
Make Adjustments as Needed
As you learn how to make a budget, know that you’ll make mistakes. You might have months when you spend more money than you budgeted and months you spend less. If you are consistently over budget, it’s essential to reassess your budget and determine where to cut back.
What Are Some Key Components of Successful Budgeting?
Every budgeting process looks different, as no two households have the same income or expenses. However, there are some key components every budget should include, such as:
- Clear communication – It’s essential to have the entire household on the same page. A financial budget is only as good as its execution. Having everyone on the same page and understanding the ultimate goals is paramount to making budget plans work.
- Flexibility – Planning a budget takes a lot of work but eventually becomes second nature. When you make a budget, you may have to make changes throughout the year. If your income or expenses change, or you discover your spending habits are not helping your budget, you may need to find ways to cut back.
- Realistic – Making a budget is great, but it’s the execution that matters. Don’t create a budget that you know you can’t achieve. Starting with a basic budget is ideal so you can get the hang of it and realize what you can and can’t do to keep it realistic.
What Is the Best Way to Create a Budget?
There are many ways to budget. The key is to find a budgeting method that you’ll use consistently. This goes back to the point of being realistic. Consider checking out the 60/30/10 budget, or the 30/30/30/10 method.
For example, creating an unrealistic monthly budget for your household only sets you up for failure. The same is true if you set a budget on a program you know you won’t use consistently; you won’t realize success.
So if proper budgeting means using pen and paper and budgeting only the necessary expenses and spending, then that’s what you should do. Eventually, you can work up to a more sophisticated budget with more robust goals rather than just paying bills.
4 Tips on Budgeting and Saving Money
Learning how to make a budget plan can initially feel complicated, but breaking it down into simple steps can make it seem much easier.
Here are four tips for budgeting to help make budgeting money easier.
1. Set Short and Long-Term Budget Goals
It may seem complicated to think ahead of today, especially if you’re learning how to budget for beginners, but setting goals is essential.
Short-term goals are anything you want to achieve in the next year, and long-term goals are something you want to accomplish in over one year, sometimes as long as 10 – 20 years, such as retirement.
Working your goals in when you build a budget can help you reach them faster. You can break your payments into monthly amounts that coincide with your goal’s timeline.
For example, if you aim to save $5,000 to buy a car and have 18 months to save it, you’d need to budget $277.77 monthly to reach your goal.
2. Avoid Overspending With a Spending Budget
When you have a spending budget, you have a realistic image of how much you can spend. This can help reduce unnecessary spending and help you focus on budgeting savings versus unnecessary spending.
3. Create a Savings Budget Plan for Retirement
Retirement may feel far away, but it will be here quickly. As you learn how to budget your money, you should include at least a small percentage of your income for retirement funds. This is especially important if your employer matches some of your 401K contributions, but if not, you should open your own retirement account and save.
4. Revisit Your Monthly Budget Often and Make Changes as Needed
Your budgeting needs will change over time. They may stay the same for a few months and then change, or you may realize some missed areas and want to rearrange your budget. Being flexible is the key to basic budgeting. It’s okay to create multiple budgets as long as you learn from each mistake and try again!
The best way to budget money is the method you’ll understand and use. Budgeting advice can help you learn where to start, but you must pull the trigger to make your budget work.
What Does Budget Mean?
Budgeting means accounting for your income and expenses and properly planning how you’ll spend your money to budget bills, spending, and saving to reach your financial goals.
What Is an Example of a Budget Plan?
Budget examples can help you learn where to start, and the 50/30/20 budget is a great place to start. This budget plan says to allocate 50% of your income for needs or fixed expenses, 30% for unnecessary or variable expenses, and 20% for savings or debt payoff.
What Should Be Considered When Setting a Budget?
When you start financial budgeting, you should consider the following:
- Fixed expenses
- Variable expenses
- Short and long-term goals
- Spending habits
- Amount of emergency funds
Now that you know the answer to why is budgeting important, it’s time to put the tactics to work! A budget forces you to stay accountable, understand where your money goes, and helps you get on the right path to securing your future.
Samantha Hawrylack is a personal finance expert and full-time entrepreneur with a passion for writing and SEO. She holds a Bachelor’s in Finance and Master’s in Business Administration and previously worked for Vanguard, where she held Series 7 and 63 licenses. Her work has been featured in publications like Grow, MSN, CNBC, Ladders, Rocket Mortgage, Quicken Loans, Clever Girl Finance, Credit Donkey, Crediful, Investing Answers, Well Kept Wallet, AllCards, Mama and Money, and Concreit, among others. She writes in personal finance, real estate, credit, entrepreneurship, credit card, student loan, mortgage, personal loan, insurance, debt management, business, productivity, and career niches.