If you want to know why Budgeting is important, this article will prove very helpful. It looks a bit deeper into this subject and explains exactly why budgeting is important.
Importance of Budgeting 101
When playing football as a kid there were generally 3 plays that were called in the huddle.
The 1st play was a button hook where the receiver just went out for a pass counted to maybe 2 or 3 and the ball would be thrown. The other plan was to cut left or right by the trash can or tree.
The last plan was just to go long and catch the ball.
Today that plan of “just go down to the end zone and catch it” is sometimes the plan that is in operation when it comes to people’s finances.
Rather than planning a budget they just simply throw the ball into the end zone in hopes that their teammate will catch the ball for the score.
Planning, in sports and especially in finances is important to be successful.
As retirement was nearing and wondering whether we would be able to make it on our retirement income, I took planning a budget to a completely higher level.
Searching online as to what should be a sufficient income, analyzing percentages of income required, sorting through all our fixed and discretionary expenses, we determined it was possible.
Financial planning and particularly budgeting is important when one wants to realize their financial goals both for the particular month and for their future.
What Is a Budget?
A budget is a financial tool that captures the income and expenses for a business or an individual as it relates to a period of time.
That period of time could be over the course of a month, or it could be a yearly budget or could be a combination of both depending upon what type of budget is utilized.
There are two overall aspects to a budget. The one side of the budget lists all of the anticipated income over the course of time.
The second part of the budget is the expected expenses that the company or the individual anticipates.
The income side of the budget is usually determined as the individual knows what revenue will be generated due to either retirement income or salary.
The expense side could fluctuate in amount, but generally, a ballpark figure can be placed in the appropriate space item based on historical expenditures.
10 Powerful Reasons Why Budgeting Is Important
1. Planning Ahead
As with anything, it is important to have a plan. The importance of having a plan can be seen when traveling, scheduling the day’s activities, and just basically an overall plan for one’s life and future.
Consequently, the importance of planning is just as imperative in regard to finances.
If one does not plan out their finances, overspending can occur which would cause the budget to go into a deficit.
A deficit can create a number of financial issues including the inability to pay one’s bills, being late with payments which could lead to added fees, and creating financial challenges that may spill over into the next month’s budget.
2. Zeroing Out
As it relates to the budget, the individual should endeavor to work at zeroing out their budget.
This simply means that all of the income and all of the expenses when totaled and subtracted from each other equals zero.
The assumption is that when all of the income is spent for the month that part of this income goes to critical line items that reflect money set aside for emergencies or contingencies.
Those items line items would be labeled as retirement, nest egg, savings, etc.
Therefore, even though the budget is zeroing out, there is surplus money that is being set aside for one’s future retirement needs as well as events in life that are uncontrollable in regards to the spending of the finances.
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3. Using Tools for the Work
To help an individual with their budget and stay on track with their spending there are a variety of software programs or downloadable apps that can help the individual.
One such app is known as Mint and can be downloaded onto a person’s smartphone.
This application is comprehensive and not only helps the individual to manage their budget but provides graphs and goal measurements in achieving their savings and retirement goals.
Additionally, this app provides a free credit score and helps the individual to realize what their net worth is.
Also, each of the individual’s bills can be linked to this app, and notifications and reminders can be set up as to when the bill is coming due.
The application also alerts, via email, when there are extraordinary expenditures as it relates to spending.
There are many ways that an individual can set up their budget.
Online the individual can find budgetary tips that provide certain suggested percentages that can be used as a guide pertaining to expense line items.
For example, in setting up one’s budget, the income could be multiplied by 25 to 35%. This percentage is recommended by some financial gurus as the amount that one should budget for housing.
In regards to insurance, the percentage could range from 10 to 20% and food can range from 10 to 15% of the income.
Additionally, transportation could be budgeted at 10 to 15% and utilities 5 to 10% with savings being budgeted anywhere from 10 to 15% of one’s income.
These are not hard and fast percentages. They are simply a potential guideline of the range of money that should be set aside for budgetary purposes.
As indicated, savings is a critical line item in one’s budget.
In fact, it could be easily argued that because savings is so critical to one’s personal finances that it should be the first line item in the budget that is set up.
The savings line item should be those monies that are set aside and put towards a nest egg.
This nest egg is critical due to the reality of life and unavoidable financial circumstances that occur.
A nest egg will help an individual address events in life such as the potential of losing a job, medical expenses, major household repairs, car repairs, etc.
Many personal finance experts suggest that a goal for the nest egg savings should be 3 to 6 months of one’s income coming into the household.
Therefore, if an individual’s salary is $4,000 a month, it is suggested that the individual have anywhere from $4,000-$18,000 designated as the nest egg.
The accumulation of this money should be deposited in a high interest-bearing money market or savings account or perhaps invested in CDs that are layered.
Talking about savings, below are some more guide to saving that you will find helpful:
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6. Fixed expenses
On the expense side of the budget are items known as fixed expenses.
- These expenses occur month after month after month.
- They are fixed.
- They may fluctuate in amounts owed each month due to the seasons and use of these services.
However, they are reoccurring.
Examples of these fixed expenses include utilities, rent, phone service, insurance, etc. These fixed expenses could also be labeled as overhead expenses.
These expense line items should be a priority in the budget because they need to be paid one way or the other.
There are no choices in paying or not paying these particular bills.
It is important to remember that a budget is not static. This means that it is not the same month after month and with no need for adjustments.
A budget needs to be reviewed month after month and often, a number of times during the course of the month to make sure that one is on task.
Therefore, a budget is dynamic. It can fluctuate and change during the course of the month and a savvy individual will adjust the budget as needed when something financially occurs that wasn’t anticipated.
Consequently, if there is a bill that comes due and was not budgeted for. That money needs to come from somewhere.
Most often, it needs to be drawn from another line item. It can be paid by incurring more revenue or decreasing any budgeted line item.
8. Leave Breathing Room
Even though it is important that the personal financial budget zero out, it is also important not to expend all of the money that is coming into the household.
It is important to have extra money at the end of each month that will offset any unanticipated bills.
This surplus of money budgeted at the end of each month could be offset in a line item on the expense side of the budget as a contingency fund.
This is just simply a small percentage of the budget that is set aside for unexpected emergencies or to be used for major expenditures.
Suggestions as to the percentage of the income to be set aside for this line item range anywhere from 5 to 10%.
Any monies set aside for the contingency fund that is not used for that particular month can then be added to the nest egg as part of the overall emergency fund.
9. The 50/30/20 Rule
Another way that the household can set up its budget is by utilizing the 50/30/20 rule.
50% of the income brought into the household is devoted to the needs of the family.
Those needs include items for expenses such as rent, car payments, groceries, insurance, healthcare, etc.
In other words, the needs do not include entertainment expenses, clothing, or eating out.
The 30% addresses in the budget those expenditures that can be classified as wants. Wants include items that can be classified as nonessential.
Examples could be eating out, taking in a movie, vacations, technology purchases, etc.
The final 20% of the budget is the monies set aside to attain one’s future financial goals.
These line items budgeted under the 20% rule include the setting up of the emergency fund, contributing to retirement, extra payments on loans, etc.
10. Different Expense Months
It is worth remembering that budgets and monies set aside for expenses may not be the same each month.
It is also important to remember that insurance premiums may come due every 6 months or annually.
Therefore, it is important to budget accordingly by either setting aside that amount divided by the number of months that it comes due each month or put the sum total in the annual budget when the premium is to be paid.
This is also true when it comes to the celebration of special events and holidays.
Those line items should reflect that month when those celebrations occur and anticipating any special events or occasions where money is expended in the celebration.
Importance of Budgeting FAQs
How Do You Make a Budget Spreadsheet?
By taking a lined piece of paper, a blank piece of paper, or using a spreadsheet, the process is fairly straightforward.
Drawing a line down the middle of the sheet or by listing the income on the top of the form and the expenses beneath, the individual can list all the income and separate from the income list all of the expenses.
The expenses should be listed out as to what they are.
Each of these two categories should be totaled and then subtracted from each other.
If there is less income than expenses, then you are facing a challenge in that that there is not sufficient or enough income coming into the household.
On the other hand, if you have more income than expenses then you have a surplus and are in an enviable position of either setting that surplus into savings or reducing any debt balances.
Also, on the expense side of the ledger or budget, you can categorize expenses as those that are fixed.
This means that they are constant and need to be paid each month. Examples of fixed expenses could be utilities, cellular phone service, rent or mortgage, etc.
Then underneath the fixed expenses can be a listing of those variable expenses that may fluctuate from month to month.
What Are Basic Expense Categories?
The basic expense categories would be items such as the mortgage or rent, insurance, purchase of fuel, groceries, entertainment, savings, etc.
Below are some more guide to saving specific amounts of money that you will might helpful:
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As this article has shown, there are definitely many valid reasons why budgeting is important.
There is nothing more exciting than seeing a well-thought-out plan being successfully implemented.
This is especially true when it comes to personal finances.
A budget is that plan that helps individuals manage their finances wisely in the current day and month and helps towards the achievement of a successful financial future.
As the old saying goes, “If one fails to plan the better plan to fail.”