Though the thought of actually making a budget might sound as appealing as having a ball and chain attached to your wallet, it can actually be quite a liberating experience. According to Erin Baehr, a certified financial planner practicing in Stroudsburg, Pennsylvania, and Chester, New Jersey, “Many people think of budgets as something negative; something constraining or confining. But actually, having a budget, or spending plan, will give you freedom. A budget simply reflects the reality of your spending, while keeping it within the parameters of the money available to you.”
The Categories You Spend In
If you don’t keep track of your spending on a regular basis, chances are there’s at least a few line items where there’s a wide gulf between what you think you spend and what you actually spend. For example, Baehr says “People are usually surprised to realize how much they spend on those quick drive-through snacks or meals, how much holidays really cost, and how much they spend on gas for their cars.” Though one trip through the drive-through might not break your budget, if you do it frequently, a large number of small costs can add up. Only after you start tracking your spending will you realize how much your guilty pleasures might actually be costing you.
One-Off Spending Adds Up
If you don’t track your spending regularly, you’re likely to underestimate the costs of one-off items — things that don’t come up on a regular schedule, like car and home repairs. When working with clients, Baehr says the first time they work together to set a budget, “we’ll come up with a monthly spending number, compare it to the actual take-home income, and realize there’s a big gap somewhere.” Setting a budget and tracking your spending reduce the gap between perception and reality.
What Spending Says About Your Priorities
Not only does keeping a budget help you understand where your money is really going, it also helps you align your spending with your priorities. Without a budget, your money just flows out of your accounts without direction. When you make a budget, you can ensure that how you spend your money matches your priorities. “Let’s say you enjoy eating out as a family,” says Baehr. “A budget isn’t meant to tell you not to do that, but rather to decide how much of your money you want to choose to spend on that. Once your amount is determined, you can go ahead and spend in that category however you please, without being anxious that you are spending too much or feeling guilty that you shouldn’t be spending at all.”
It’s Okay to Spend — Within Reason
Budgeting not only allows you to feel secure that you’re prepared for unexpected expenses, but it also gives you the freedom to enjoy spending the money you’ve budgeted for entertainment or other fun things without worrying that you should really be putting that money to use elsewhere. “Having money set aside for those unexpected repairs takes away a great deal of anxiety,” observes Baehr. “Deciding ahead of time how much should be spent in categories like entertainment can allow you to enjoy yourself without worrying about what other category you are shorting.” Having a budget also carries the added benefit for couples that once the budget is set, you can hold each other accountable. When couples have a hard time agreeing on how the other spends money,” says Baehr, “having a set amount built into the budget that each spouse can spend no questions asked reduces arguments.”
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FAQs
Not only does keeping a budget help you understand where your money is really going, it also helps you align your spending with your priorities. Without a budget, your money just flows out of your accounts without direction. When you make a budget, you can ensure that how you spend your money matches your priorities.
What do you learn from making a budget? ›
A budget is a plan that helps you manage your money. It helps you figure out how much money you get, spend and save. Making a budget can help you balance your income with your savings and expenses. It guides your spending to help you reach your financial goals.
Why is it important to learn about budgeting? ›
Budgeting keeps your finances under control, shows when you need to make adjustments to your spending, and helps you decide where your money goes instead of wondering where it all went. Budgeting helps you answer these important questions: Where does all my money go? Is there a way to spend less?
What are 5 benefits of budgeting? ›
Why budgeting is important: 5 key benefits
- Keeps you from overspending. ...
- Enables you to manage debt and build credit. ...
- Gets you moving toward your short- and long-term goals. ...
- Prepares you for emergencies. ...
- Makes saving for retirement easier. ...
- Use a budget to gain control of your financial life.
At the most basic level, a budget is a way to keep track of the money you are getting and the money you are spending. A budget is a great way to make sure that you can cover your expenses from month to month.
What are 5 most important things about budget? ›
What Are the 5 Basic Elements of a Budget?
- Income. The first place that you should start when thinking about your budget is your income. ...
- Fixed Expenses. ...
- Debt. ...
- Flexible and Unplanned Expenses. ...
- Savings.
A budget is a plan you write down to decide how you will spend your money each month. A budget helps you make sure you will have enough money every month. Without a budget, you might run out of money before your next paycheck.
How does budgeting help you? ›
A budget helps create financial stability. By tracking expenses and following a plan, a budget makes it easier to pay bills on time, build an emergency fund, and save for major expenses such as a car or home.
What are the three importance of budgeting? ›
Well, a budget keeps you in the 'know' about how much money you have, how much money you're saving, and/or how much you might be over-extending your resources. In other words, budgeting puts you in charge of what you can afford and when you can afford it.
Why is the study of budgeting important? ›
Budget is among the major tools for implementation of the objectives and policies of the organizations. In other words budget provides the basis for decision making in the organization. Budgeting plays importance not only to organizations but also to individuals on how to spend in relation to the income available.
Planning, controlling, and evaluating performance are the three primary goals of budgeting.
What are the three basics of budgeting? ›
The basics of budgeting are simple: track your income, your expenses, and what's left over—and then see what you can learn from the pattern.
What are the 4 most important reasons for creating a budget? ›
Here are 7 reasons why budgeting your money is a must:
- It shows you where your money is going. ...
- It helps you identify waste. ...
- It helps you make financial decisions. ...
- It helps you reach your goals. ...
- It keeps you from accumulating too much debt. ...
- It gives you a clear picture of your finances. ...
- It provides peace of mind.
Budgets can be called upon to play a variety of roles. We shall discuss five of these. Three are major roles: planning, motivation, and evaluation; two are minor: coordination and education. Planning—Operational budgets are plans; they provide details of what management hopes to accomplish and how.
What are the four purposes or advantages for budgeting? ›
Four purposes or advantages for budgeting are planning, coordination, performance measurement, and punitive action.
How do individuals benefit from creating a budget? ›
Budgeting helps to: Put you in control of your money and ensure it is being used to meet your needs and achieve your goals. Show you where your money is going and reduce wasteful spending. Improve your ability to pay all of your bills and not run out of money during the month.
What is the importance of a budget? ›
Why is budgeting important? Having a budget helps you get a clear idea of how much money you have every month, and how much you can afford to spend while still saving for emergencies and financial goals.
What does the budget challenge teach you? ›
Budget Challenge teaches financial capability, not just knowledge. During our patented 10-week simulation, students are able to practice money management skills and receive real-time feedback that impacts their behaviors and attitudes.
When creating a budget, it is important to? ›
Understand your income and expenses: The first step in creating a budget is identifying how much you earn and spend each month, as well as any extra income and expenses. Know how to track these numbers with help from the Consumer Financial Protection Bureau.
