Why Is Budgeting Important
21st January 2021
Speak to any financial advisor and one of the first things they’ll ask is: “do you have a budget?” That’s because having a budget is incredibly useful to provide a clear overview of your incomings and outgoings, highlighting any areas to help improve your money management.
With Christmas drawing closer, it’s essential you know how to budget for this big event and avoid financial problems. This way you’ll hopefully enter the New Year in a good financial position and still have an enjoyable festive period. Here we explain how to budget your money and answer the question of: ‘why is budgeting important?’
Why is Budgeting Important For Me?
Many people are turned off the idea of budgeting as they think they can’t do it or that it doesn’t apply to them. Excuses such as not having enough money to bother learning how to budget and that it will take too much time are common reasons given, but they are also myths.
Budgeting can be done by anyone and is important no matter what your income as it allows you to create a spending plan for your money. This puts you in control and makes sure you always have enough money for the things you need and that are important to you.
The Benefits of Budgeting
Before you learn how to budget your money, understanding the many benefits it provides is vital. For starters, creating a budget is relatively simple. All you need to do is work out your incomings and outgoings, subtract your total outgoings from your income and make sure you still have enough left over to meet any savings goals.
There are various other benefits to budgeting, such as:
- It can prevent overspending as your budget will determine when you should stop spending for the month.
- More money should go towards savings, whether it’s for a house deposit, new car, holiday or Christmas presents.
- You will become more organised which should make focusing on money goals easier.
- Eliminate unnecessary spending, highlighting where you’re overspending and stop it.
- Your conscience will be clear with a plan in place, knowing whether you’re on target or not.
How to Budget Your Money
It’s easiest to lay out your budget in a spreadsheet with a few different columns. Firstly, work out your monthly income. This could just be your salary but remember to include any additional payments you receive for freelance or other work. Next, add up your essential monthly expenses. These should include rent or mortgage payments, household bills, any loan repayments, mobile phone and internet charges, and a rough estimate of groceries.
Hopefully, at this point your income will be larger than the outgoings. Once this is done you can draw up your financial goals, which could be saving a certain amount each week or month, getting out of debt by a set date or anything else.
Finally, add in all your other non-essential expenses such as dining out, cinema, clothes and more, identifying anywhere you can cut these down to meet your financial goals.
Be sure to keep reviewing your budgeting progress to see how effectively you’re making savings. Also, it might be the case that you face some unexpected costs – like higher bills or car repairs – so you might want to consider a small loan to cover these expenses making sure the monthly payments fit within your budget.
Types of Budgeting Strategies
There are many different strategies of how to budget, with various tools available to help. Aside from the simple spreadsheet method outlined above, these are a few other good budgeting strategies:
Subtraction: Simple yet effective, add up all your monthly bills and take this away from your income along with how much you want to save, which provides the amount you can spend for the rest of the month. This is simple and can be done on a calculator.
Envelope: Also known as cash budgeting, this strategy makes it harder to overspend accidentally with credit or debit cards. All of your budgeting is done in cash, with envelopes for each category for the month, such as food, travel costs, electricity bills, eating out etc. This way you have a greater view of when funds are running low for a certain area.
Proportional: With proportional budgeting you split your monthly spending into three categories: needs, savings and wants. Choose how you will split this, it could be 50% to needs, 30% to wants and 20% to savings for example. It can be tweaked depending on the month, spending a higher proportion on wants for Christmas presents in December.
Apps: If you want to automate a lot of your budgeting then consider one of the many great budgeting apps available. Some will link to your accounts and all you have to input is your spending to stay on top of your budget in real time.
With a better understanding of how to budget your money you should be able to take more control of your finances and meet your savings goals.
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