Four Reasons to Budget

by on November 16, 2011

When it comes to managing your money, there are lots of reasons you should create a budget.  Budgeting doesn’t just mean setting aside a specific amount of money for each expense each month, but really means learning, analyzing and improving your finances each month.  The majority of people that think they are budgeting aren’t really putting the work in to get a real understanding of how their money is being spent.  Taking the time to get this right can mean the difference between becoming wealthy and working the rest of your life to barely get ahead.  Here are four top reasons to create a budget.

A Budget Helps You Understand Your Finances

First and foremost, a well-created budget can really help you understand your finances.  Think of your household as a business.  Your income is your revenue and your expenses are, well, your expenses.  Now think about how to run a successful business.  You must take each expense, categorize it, and add them up to arrive at your total expenses.  Furthermore, you must work toward maximizing profit by keeping your expenses low relative to your revenue.  The same is true for your home budget.  You must account for all of your spending in order to really understand your personal finances.  Just looking at your income versus your main expenses is not enough, as the details are where the real information lies.  In comparison, do you think you could get a real feel for the profitability of a business just by looking at some of their expenses and using estimates?  Absolutely not, you must dig into and analyze your expenses if you really want to make your budget work.

Budgeting Can Reduce Wasteful Spending

A second reason to budget is to control wasteful spending.  Working through your expenses and actually quantifying them can show you areas of wasteful spending.  In fact, a well-formed budget will categorize each expense.  You can look at each expense and use your common sense to find where your spending has gotten out of control.  It’s easy to justify your spending purchases while you are at the store, but when you go home and add up all your expenses you may see patterns that you weren’t aware of before you started your budget.

Because Budget Estimates Are Wrong

The third reason to keep a budget is because it’s more accurate than your estimates.  Indeed, it’s easy to estimate how much you pay each month for your mortgage or car payment, but how much money do you think you spend on items that cost less than a hundred dollars? Items that typically fall below the radar on your budget?  Realize that the average person spends nearly as much on miscellaneous, extraneous and frivolous items each month as they do on their rent or mortgage!  In almost every case, estimates of budgeted expenses are lower than actuals.  For example, ask someone how much they spend on food each month and they may give you an answer such as “a couple hundred dollars”.  It sounds reasonable, right?  Now sit down and look at the receipts and credit card statements for that month and start adding up the food costs.  Here’s an example of what those costs might really look like:

  • Dining out twice a week, each time cost $25 – $200
  • Coffee at Starbucks twice a day, mocha in the morning and coffee before lunch – $180
  • Lunch five days a week while at work, average price of $5 entree and $2 soda – $150
  • Two trips to the grocery store each week, average $110 per trip – $880
  • A trip to a warehouse store once a month – $150
  • Impulse buying of snacks and sodas while on the go – $30
  • Total Actual Food Costs – $1,590

As you can see from the example, actual food costs in this case were well over $1,000 higher than the initial estimate.  You’d be surprised at how many other categories this estimation error occurs.  And since the errors are almost always on the high side, the total cost of mis-estimation can be in the thousands each month.

You Will Save Money Using a Budget

The fourth and final reason to budget is because a budget will save you money.  Hands down, the best way to save money is to create a budget that categorizes, sums, and analyzes each type of expense you make in order to find areas that you can improve.  Trying to get serious about saving money without creating a budget is basically just guessing what expenses to target.  The knowledge and insight that a budget can give you will spell out where to focus on your expenses to get the biggest bang for your buck.

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