One financial planning tool that helps individuals, businesses and even the government is- Budgeting. With proper budgeting resource allocation can be done in a very effective and efficient way. On a macro level it is the duty of the government and on micro level it is all individuals and industries that perform this function.
Essentially this tool has an amazing utility to ensure that the financial goals are achieved. We can match the income with expenses and find variances where we have gone up or down. Even our mothers who manage the household make a monthly budget. Indeed, a very useful function.
In this blog, you will explore the meaning of budgeting and what makes it so important.
Basics of Budget
Budgeting consists of three main components. Here are they:
1. Income
Income represents the total inflow of money. Whatever you earn will be counted as your income. It can either be wages, salaries, interest income, freelance income, profits from sale, rental income or any other source. This component is the basis of making any budget.
2. Expenses
Expenses means all the costs you incur on a daily basis. It can be household, transportation, food, insurance, debt, entertainment, school fee and even savings. One can divide the expenses into two categories- Fixed & Variable to keep a better track.
3. Savings & Investments
Last but not the least is savings and investments. It is the money you put aside for your retirement, emergency fund or any kind of big expense in the coming time. Most people divide their income into various categories and this one takes the center stage.
Why is Budgeting Important?
The main question is still unanswered! Why is budgeting so important in today’s time? Given below are some reasons why. Let’s understand them one by one.
1. Financial Clarity and Control
Budgeting is what gives you a sense of control and financial clarity. It will help you understand what exactly is your financial position. One can easily forget how much his expenses are or how much he has overspent. Maintaining a budget and keeping a log of everything will prevent it. One can’t control every aspect in life. But financial control can be achieved using budgeting.
2. Achieve Financial Goals
If you are planning a long holiday, early retirement, marriage of your children or maybe investing in real-estate, you should have the resources. And for that budget is the key. Without it, you will be lost and you can say goodbye to all your future goals. Saving for a down payment will also require you to know how much money has to be put aside. Making the right budget will ensure that you reach your goals before times!
3. More Financial Freedom and Less Debt Accumulation
Why budgeting holds so much importance is because it will inculcate a habit to save and allocate your money for the required activities. Arranging $10,000 to pay debt can be excruciating. But if you had made a budget, you would have easily saved $10,000 to pay the debt on time. Most people have a habit of spending more than they earn. Maybe due to provisions of plastic money. If you start budgeting your debts will reduce and gradually you will experience more financial freedom.
4. Financial Decision Making
Financial decision making is not everybody’s cup of tea. In order to start critical thinking, budgeting is definitely the first step. It will help you question why you need to spend on something and will it be beneficial for the future. If you spend too much on entertainment or dining out or maybe clothes then it will help you control such habits. Everybody wants to make smarter choices in life. But who is actually working upon it? You can start this by simply making a small budget every month.
5. Manage Unexpected Expenses
Nobody knows where life will take us, right? It is so unexpected. Can you predict your health conditions or any mishappening that might occur in the future? No, but you can start saving for them. You can experience “Just In Case” moments anytime. So why not make a contingency fund? To find out how much you can put in it, you will require a budget. Therefore, budgeting is the key to manage even the unexpected expenses.
Budgeting: Final Thoughts
Many people misunderstand budgeting as cutting expenses or lay-offs. Rather it is a strategic tool that will help you take complete control over the expenses, making informed decisions and finally achieving financial goals.
Thus, if you are planning to buy anything big, pay-off your debt or even maintain a healthy lifestyle, budgeting will definitely come in handy. It will become the key to your stress-free life. Make sure that you inculcate the habit of budgeting in your kids as well.
What are your thoughts on budgeting? Comment down below.