The Purpose Of Budgets: You May Be In For A Pleasant Surprise
Budgets are joy killers, right? Budgets are meant to reign in fun, limit any hint of extravagance and put a stop to your spending, yawn. Well, that’s only part of the story. Most personal budgets serve dual purposes.
One purpose is to put you in a position to make informed decisions on where to prioritize your spending. However, the other purpose is to act as a roadmap to help you achieve your personal financial goals. So, in a way, budgets can also help you to spend.
Now almost no one finds the budgeting process exciting. It may be dull but budgeting is well worth your time and effort. You don’t have to spend hours slaving away to create a personal budget masterpiece. However, half an hour here and an hour there will put you in a position to understand where your money is going, compared to where you believe it should be going.
Starting At The Beginning
Budgeting usually starts with an empty Excel spreadsheet and a straggling mountain of tattered receipts and statements and a look of utter frustration on your face! Fear not, this too will pass. By adopting a three-stage approach to building your personal or household budget you will soon be revolutionising your personal finances:
- Understand where your money comes from and just how you are currently spending it
- Make informed decisions on prioritizing your spending decisions
- Budget with your intended lifestyle in mind
Are You A Spender Or A Saver?
The spectrum connecting spenders and savers is a broad one and all of us fall on it somewhere. Regardless of where you sit on this spectrum, budgets will help you make informed financial decisions.
Budgets can assist savers to spend and spenders to save. If you sit somewhere in the middle, you are probably looking for input on both. Consider for a moment your typical saver.
Why Savers Should Budget
If you’re a habitual saver, you may not really need a budget to control your spending. A budget can help and it can give you clearer information to base your decisions on, but you probably already watch your spending. Budgets will help you spend on the things that are important to you and your lifestyle.
How Budgets Enable Savers
Imagine for a moment that you’re a perennial saver. You don’t have a budget but you think you’re naturally good with money. You’re conservative in your spending habits and avoid debt.
However, there are important things you could be actively directing your savings into, like investments and your retirement. It’s difficult to achieve financial independence without having a plan to get there.
A budget helps you clarify what spending is important to you and gives yourself the mental permission you sometimes need to spend on it. The saver in you can still say yes and be comfortable in the knowledge that you’ll still have money to save. So, everyone wins.
How Budgets Help Spenders
Now you may be a natural born spender but you too can be helped by a budget. All too often we spend way too much on unimportant things at the expense of more important priorities. If you splurge all your cash, chances are, your retirement will look pretty grim.
A budget helps spenders ensure that when they need or want to spend on something really important to them, they will have the money on hand. Your personal budget helps you avoid overspending on the trivial stuff, so you have money for your important passions.
Budget With Your Desired Lifestyle In Mind
Many misunderstand a budget’s purpose. A budget simply guides your spending and saving to ensure you make informed decisions directing your spending.
A lifestyle goal is a good example of why you budget. If travel is one of your passions, create a separate budget for your next holiday. Then, ensure your spending decisions help you fund your trip. The maths is remorseless. If you want that exotic overseas holiday, the money needs to come from somewhere and that shouldn’t be your credit card!
Budgeting is about ensuring you see the overall picture, enabling you to make decisions about what matters most in your life. So, think of your budget as a roadmap to help you navigate your way to your desired lifestyle. Once you’ve clarified what aspects of your lifestyle are priorities for you, you can split them into:
- Trinkets and experiences that add meaning and fun to your life
- Experiences you want to explore later in life but that can wait right for the moment
- Desirable experiences or trinkets you would like to have but which are optional.
Download An Expense Tracking App
While you can easily track your budget on an Excel spreadsheet or even a scrappy sheet of paper, there are a host of great apps available now to help you track your expenses, monitor your budget and manage your money.
Check out Australian expense tracking apps like Pocketbook Personal Finance Expense Tracker, MoneyBrilliant, or MoneyPad or budgeting apps like as Pocketbook, TrackMyGoals or Good Budget. They are well worth your time.
Budgets Help Both Spenders And Savers
Both spenders and savers can make errors of judgment in the absence of a budget. Savers tenaciously resist spending on what is most important to them, while spenders never have enough money in their pocket to spend on what is most important to them.
Without a clear budget strategy and financial plan, both savers and spenders can end up unhappy and unfulfilled. Your natural tendency to either spend or save needs to be complemented by a clear plan with your budget priorities mapped out. That’s what budgets do. They help savers to spend strategically and spenders to save sensibly.
Final Observation
When you get serious about being in control of your personal finances, one outcome of smarter budgeting is you ultimately have more money to manage. Smart saving and sensible investing can help you increase your income line at the top of your budget, opening the door to more options in your preferred lifestyle, regardless of whether you are a natural spender or saver!