What Is A Budget? Why Is it Important? How To Create A Budget

Budgeting is a good habit that helps you keep track of your future expenses. IF you will not create a monthly budget, you won't be able to enjoy the after retirement phase of your life. So, do you want to get into the habit of budgeting? Read this guide for help.

Published On: 2020-08-17

Written By: Muhammad Umair Malik

Budgeting is the most important financial habit to adopt. There are so many reasons to do budgeting like achieving your financial goals, avoid getting financially overwhelmed, avoid getting indebted, and what so not. The question is, why wouldn’t anyone do not want to go for it?

It is often perceived that budgeting is boring. When surveyed by Standard Life, 31% say that budgeting is a tiresome task; another 19% of people replied that they lack time for budgeting. The results were very confusing. The survey states that almost 50% of people polled resisting budgeting, even though they face financial struggles. 

It’s petty that something so useful, so helpful spells doom and gloom for people. Even though economic stability now a day is not really good, budgeting is continually being neglected. People do not have an idea about what budget is and how to make a perfect one. So let discuss it.

What is a Budget?

what is budget

A budget is simply a ledger to help people see the incoming and outflow of money. Through budgeting, people come to know what income or money they have and what are their expenditure .

Families and businesses can get insights into their expenses easily. The businesses valuable insight controls unforeseen expenses, and hence people can save money to buy valuable things.

Why Is Budgeting Important?

why budget is important

Talking about its major benefit, a budget provides a peaceful financial experience to a person or business. Families and business owners can get a peace of mind to an area that is stressful for them through proper budgeting. Financial independence, security, and empowerment can be obtained through proper budgeting.

Here we are pointing out some things that will specify why the budget is so important in your lives.

1. Our brains are not accounting spreadsheets

budgeting

Building a budget can be beneficial to anyone with income and expenses. A properly written budget frees up your brain to focus on other valuable things in your life. It’s equally important for people living on daily wages as it is for larger than life companies with lots of employees. 

So budgeting keeps people worry-free from wondering where their money has gone and helps them eliminate overdraft charges, high-interest rates, and other miscellaneous expenses often levied as a result of poor money management.

2. It is important for money management

Budget is vital for those who routinely earn more than they spend as it highlights money that can be invested in saving accounts or other worthy investments. Also, a budget helps manage the funds for those who spend more than they have been earning, focusing on avoidable expenses.

3. Budgeting helps you to keep a track of your financial goals

budget and financial goals

Keeping track of your financial goals is what you can achieve through budgeting easily. It goes parallel with controlling spending. Budgeting becomes so important if you try to achieve your financial goal.

To be honest, setting financial goals and dreaming of financial freedom is pretty easy, and anyone can do it. But it is way beyond just setting a goal as you also have to set a defined timeline. And here comes the challenge, often an individual get failed to achieve it.

You need to stick to a plan to achieve the goal and stay focused. And that’s where a budget comes to help you. Reverse engineering of your goals is done through your budget. And you set boundaries on your expenditures to stay on financial track.

4. Budgeting can help your marriage

budget saves marriages

For married couples, the budget plays a significant role. It keeps you and your spouse united against profusion. Budgeting lets you plan your future financially, make you accountable for each other, and make sure you don’t forget your partner’s financial and basic needs.

Money fights tend to be the biggest problems in breaking marriages, and budgeting is really important if one wants to avoid fights due to financial stress. 

5. Budgeting is important to be prepared for emergencies

Life is unpredictable, so liquid money. How you earn money, it goes back the same way. So budgeting is much needed to be prepared for an emergency expense.

Life is full of emergency expenses of any sort. A huge strain can fall on your pocket in the shape of hospital bills, unexpected home repairs, an emergency trip, a high utility bill, etc. So if you don’t prepare yourself to cope with the finances, those expenses that come your way will break your bank for sure. And the situation can be pretty painful.

Budgeting, on the other hand, lets you make room for emergency expenses that may hit you anytime soon. So it’s important to have a budget to avoid all sorts of financial difficulties in case of an emergency.

6. Budgeting helps you become debt-free

budget helps you getting rid of debt

Ok, various people in the world are paying massive debts for the things they don’t really need in the name of credit cards. There are many adverse effects of debt on your life, and if you really want to have some money savings, then you have to stop spending it on useless things you can’t afford. And the budget will help you get rid of the habit of splurge spending.

7. A useful thing with an uncomplicated planning

There is no reason to avoid budgeting as it is so simple to build yet so useful for financial management. There are no fancy software and financial advisors required for building a budget. Depending on the monitory amount, a budget ledger can be created with a pencil, paper, or a simple computer spreadsheet. 

There are even free templates online to print out.

8. Budget lets your ledger go surplus

The ledger is a list of transactions of money received (income), money spent (expenses), and a calculation showing the difference between them. There will be a negative number shown in ledger if a household spends more than income. But one can catch the extra expenses in ledger through budget and families can aim for a surplus so savings can be invested in various accounts.

How to Create a Budget?

how to create a budget

Creating a budget is an art in itself that everyone can master through a little practice. One should never lack behind learning the trick to make a foolproof financial budget for a month. Below are some steps for your guidance on how to create a monthly financial budget.

Step 1: Gathering the financial slips, documents, and statements

The budget cannot be made without evaluating the expenses. And to evaluate your expenses, one should gather all the financial documents that may be comprised of many things.

Gather the documents listed below for the last three months.

Expenses

Checking and savings statements

Credit card statements

Loan statements

Shopping receipts

Annual expenses receipts, e.g., licenses for vehicles and pets, medical visits and prescriptions, or holiday trips. 

income and expenses

Income

Checking and savings statements (if interest is paid on money in these accounts)

Pay stubs

Benefits statements

Allowances statements

NZ Super

Support payments

Borrowed money statement

Step 2: Make a simple ledger

After evaluating the income and expenses through documents, it’s time to record all the data in ledger finally. If you can handle, do it on your laptop or PC on secure software, you can DIY on a simple paper spreadsheet.

List all of the month’s expenses in one column. And in the second column, refer to the income documents and list all the transactions for the month. This will help you evaluate the difference, and you will be enlightened to know the forgotten little worthless expenses.

Step 3: Do the calculations

Add all the financial values in each column then subtract the total of column one from column two.

The final figure represents the amount of money left after all the expenditure at the end of each month. Make sure that a positive figure should be there. Or else, it’s never too late to fix it. Repeat this budgeting method for two months, and you will be amazed at how well your financial behavior has changed over time.

Fixing the negative budget

There are three ways to fix the budget in the negative.

Reduce expenses on groceries through coupons like using Walmart coupons or Target coupons 

Increase income, 

Or both.

There are many ways to save money on family expenses. 

You can save on food expenses by not eating out.

Carpooling is the better way to save your commute expense. Also, you can use public transport to save on car expenses.

Controlling utilities is another way to save a lot of money. Choose smart home devices, check companies with lower prices and packages, and use the living room only for family time. 

Use e-textbooks, or purchase used ones. 

If much money is owed to credit card companies, consider applying for a loan to consolidate this type of debt and considerable money by eliminating accruing interest. Because expenses are listed, it’s much easier to process and more likely spark ideas for reducing expenses.


Conclusion

As the pace things are changing today, it’s essential to plan for the future while taking care of today. Be realistic when cutting expenses—depriving oneself of all the joys in life will not provide the motivation needed to stick to a budget. Balance lowering expenses with increasing income, so managing money does not become a dreaded task. Be part of the 50% of people that have discovered financial stability by creating and sticking to a budget.

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importance of create a budget


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