The Purpose of Budgeting and Why it’s Important

When done correctly, budgeting is the best way to manage your money. The purpose of budgeting is to focus on how your money is coming in and going out each month, as well as plan for future repayments. There are so many tips and tricks on the best way to manage your money, but not all methods work for everyone.

Unsure why budgeting is so important, or how you can create a budget? Here are our helpful hints.

Why is budgeting so important?

It keeps you focused on your goals

Budgeting keeps you on the right track to reaching your financial goals. Having a solid budget allows you to monitor your progress towards a specific goal and helps you steer clear of temptation. For example, if your financial goal is to save for a house deposit or a new car, your budget is more likely to keep you on track and sway you from sales or purchasing items that give you instant gratification. Budgeting will keep you grounded and help build your mind set up for long-term financial satisfaction instead.

If you need some form of fulfilment, try breaking down your overarching goal into bite-sized ones to help you achieve instant gratification sooner. If your goal is to save $20,000 across two years, break that larger goal down into smaller goals, such as:

• Saving $10,000 in the first year
• Saving $833 per month
• Saving $192 per week

These smaller goals are much more attainable and can help you focus on your end goal.

Helps avoid spending money you don’t have

One of our main troubles without budgeting is spending money we don’t have. You might know what you’re roughly spending per month, but it’s hard to control your spending without hard, accurate numbers. Without a budget, nothing keeps you accountable for splurging on a new pair of shoes or a dress on sale (or all the little things in between). After pay-day, many of us are lulled into a false sense of security and, as a result, often spend what we don’t have. This leaves us scrambling right before our next pay kicks in, and the cycle repeats once again.

When you implement a budget, you know exactly how much you earn, how much you can afford to spend, what you actually need to allocate to bills and how much you can save.

Builds your wealth for retirement 

Another crucial aspect of budgeting is building wealth in preparation for retirement. While spending money wisely is important, so too is saving money wisely. Setting aside some money in your budget to add contributions to your superannuation fund or other investments is preparing you for a more comfortable retirement. While a little extra cash might be handy now, it can go a long way in the future to ensuring you have the retirement you’ve dreamt of.

For more information, read our blog on The Fast Way to a Wealthy Retirement. 

Prepares you for the worst

While it’s not fun to think about something bad happening, budgeting your money will set you up in case something unexpected pops up. This could be anything from unplanned medical bills, car breakdowns, vet bills, or more severe things like being laid off from work, a death in the family or a marriage breakdown. When planning your emergency fund, you should aim to set aside three to six months’ worth of living expenses. It might seem like a big obstacle to set such a significant amount of money aside, but even putting aside $20 a week can help your emergency fund grow.

Highlights bad spending habits 

If you’re putting a budget together for the first time, you might be in for a few unpleasant surprises. Many people avoid going through their bank statements – mostly because they’re too scared of what they might find. Among shopping splurges, frequent takeaway meals, or gym memberships you thought you’d long since cancelled, a budget can help bring all your negative spending habits to light. While it might not feel great at the time, highlighting these habits means you can start working on how to fix them going forward. 

Helps you avoid or get out of debt 

To build wealth, you need to stop spending money on things you can’t afford. In particular, you need to stop hindering your monthly income by using a large portion of it to pay somebody back (with or without interest) for things you couldn’t afford in the past. Regardless of your debt position, budgeting can help you avoid and even get out of debt. You can plan to save for big purchases outright by having a structure in place, rather than taking out a loan or putting it straight onto your credit card. This promotes positive spending habits and helps you build future wealth.

What should you include in your budget?

You need to ensure you include a few fundamentals in your budget. These include:

• Revenue

The first main aspect to focus on is your revenue. This includes any income stream. Revenue extends beyond what you take home in your regular paycheck. It also includes revenue from investments, interest on savings, dividends, and other sources.

• Expenses

Expenses relate to all your outgoing costs, such as bills and general living expenses. These typically fall into one of two categories:

• Fixed

These are the expenses that remain the same each month, such as rent or mortgage repayments, insurance, loans etc.

• Variable 

These types of expenses change each month. This might include things like petrol, grocery bills, motor tolls, etc.

Once you’ve got an idea of your revenue and expenses, you can use it to find how much money you have left over as profit. To do this, subtract the revenue from expenses. Having this profit figure will help you to determine how much you’ve got to save or invest.

The primary purpose of having a budget is to create a guide for you to carefully track your money and grow your wealth. Our financial advisor team of experts is ready to help. Book a free meeting today.

Ready to get started? You can download our budgeting guide here.