On the Importance of Making a Budget

Budgeting is commonly regarded as one of the most important tools in personal finance planning. Realizing the importance of the budgeting process is necessary if your are to develop a budget worth sticking to. Without this knowledge, budgeting will simply be one of those “unnecessary processes.” Everyone will point to the fact that your lack of budgeting is the cause of all your financial woes. However for you, you’ll find it as one of the most dreadful exercises to engage in because it will force you to take a critical look at your spending habits and force you to make some difficult choices – something which you may not be willing to do.

So, how really important is a formalized budget?

Let’s look at these three things:

It guides your spending

Money is obviously not an end to itself: it does not have any real value. For this reason, it is only used to achieve certain goals. Formalizing these goals by writing them down (or saving the in one of the many budget templates) is what constitutes budgeting. Like any other goals, writing financial goals in terms of a budget gives you a proper guide on spending. The budget acts like a compass that helps you see if you are heading towards the right direction.

It will help you explore new ways of making money

The budgeting process is not all about spending. This is because the money that needs to be spent must come from somewhere. This “somewhere” should be properly detailed in the budget to make sure that the goals are realistic. What happens after this, (assuming that you prepared your list of expenditure before you did the list of income) is that the expenditure will probably exceed you income. You will then explore new ways of making more money to carter for your needs or you’ll explore on ways on how to make more from your current means. Truth be said: it is much more easier to get money to buy a certain good or service, than to get money for the simple reason that “I need more money.” There is a great motivation that comes with the budgeting process.

It helps you cut down on wastage

If you don’t have a formal budget you can list 10 things that you spent your money on, which you don’t think were necessary and you left out on very important things. Worse still, you probably can’t account for 20% of you last month’s income.

Sounds familiar?

Well, here is where proper budgeting helps. Having a budget helps you focus on the priority areas. Like many people, you probably desire to spend more money than you can afford. If all these things are put in a budget, you’ll be able to properly rank your priorities and you’ll see which things you can do without and which ones you can postpone.

Having a budget is the foundation of a stable financial plan. Without it, a lot of planning will be useless. Many goals will not be achieved and you will be suffering from the continual feeling of “I know I can do much more with the money I am getting.”