Managing your finances is an essential part of living. Without good management, you might not have enough money to pay your rent or retire in comfort. On the other hand, with excellent financial management and budgeting, you can make the most of every dollar and ensure your future is well-taken care of. In this article, we will explain the basics of budgeting, why it is important, and how it can change your life.
What is Budgeting?
Ah, the million-dollar question: What is budgeting? While we could give you a roundabout answer with many definitions, we like to keep things simple.
According to the Cambridge English Dictionary, budgeting is:
The process of calculating how much money you must earn or save during a particular period of time, and of planning how you will spend it.
Why is Personal Budgeting Important?
On an individual level, personal budgeting is the art of planning ahead. It is how you determine not only how you spend and save the money you make, but whether you need to earn more to reach your goals. Personal budgeting can be done for the present and the future. Budgeting for the future is when you have a goal in mind, such as saving $10,000 in five years, and you plan out your finances so that you can reach that goal.
So, why is personal budgeting important? Because it gives you peace of mind. When you know exactly how much money you make and plan out how to spend and save it, you don’t have to worry about your present situation. Furthermore, budgeting allows you to reach financial goals that could otherwise be impossible.
Making a personal budget is fairly easy, especially with the right tools. Here are a few tips for budgeting at home.
Create a Budget and Stick to It
This is vital. When you decide to make a budget, it will be worthless if you do not follow it to the letter. The best way to ensure you will stick to your budget is to make it realistic. Account for every penny you make. Keep in mind that one of the most commonly under-budgeted costs is food.
Use Tools
There are a few different tools you can use to create a nice-looking, organized budget. Excel spreadsheets are probably the most common, but if you prefer more style and personalization, we recommend the Personal Budget Planner template on Craft. This template makes it easy to track your monthly earnings and expenses.
Set Goals
When you make a budget, be sure to set some SMART (Specific, Measurable, Achievable, Realistic, and Time-Bound) goals. These goals are another way to make you stick to the budget–because it gives you an objective reason to.
What are the Key Benefits of Budgeting?
While personal budgeting has a few overarching advantages, it is valuable to analyze the specific benefits. Budgeting is not just an old-fashioned habit, but a vital part of financial health that everyone should be doing.
1: Spending Control
Once you have created a realistic budget, you will be on the road to controlling your spending. How is this possible? Well, a budget helps you to see how much you are currently spending and on what. That can be pretty revealing. You might find that you are spending far too much on things that are not nearly as important in your life as other things.
Secondly, budgeting helps you to control your spending by planning it ahead of time. When you decide how much money to spend on essentials and nonessentials, you can make sure you are allocating your money wisely before you ever spend it.
2: Preparation for Emergencies
Instead of living paycheck to paycheck, budgeting gives you the ability to make choices to lower costs. This can mean that you will have some money to put aside for savings. On your budget, you can decide how much you want to put away for the future. Then, you divide these savings into different categories. One of these categories is an emergency fund. By always making sure you have enough money to see you through a period of unemployment or other unforeseen eventuality, you’ll have peace of mind.
3: Happier Retirement
As with emergency savings, a budget can help you plan and save for retirement. Everyone knows that getting started with saving for retirement as early as possible will mean more money in the bank when the day comes. When you create a budget, you can decide to do things like not spending cash on an expensive trip so you can put it into your retirement fund and invest it. The longer it is invested, the more money you will have later. Using a budget to make important decisions now results in not having to worry about money later during retirement.
4: Highlights Spending Habits to Avoid
Budgeting can highlight avoidable spending habits. For instance, if you start by looking at your expenses for the last month, and you determine that you spent $600 dining out, but only $400 on groceries, you can now decide on a future budget to spend less and save more by not dining out as frequently.
Additionally, budgeting helps you to take a step back and evaluate which expenses you truly need, and which might be causing you money troubles. You can think of it as a diet for your finances. A budget will reveal areas where you can cut costs and ensure your financial health is in a good place.
5: Keeps You Organized
With a budget, you can keep everything organized. By including every expense in your budget, you won’t get lost or overwhelmed by all of the bills you need to pay. Furthermore, budgeting can prevent mistakes that happen without a plan.
For example, imagine you forget to pay a bill because it gets lost. You will most likely end up paying more because you are making a late payment. If you had planned for that bill by putting it in your budget, you would not have to worry about extra fees for being late. Personal budgets keep your finances organized so that you can focus on what matters most, and not stress over how and when to pay your bills.
Budgeting with Craft
There are many essential reasons why budgeting is important for your financial planning. Do you want to start creating a budget? Try Craft’s Personal Budget Planner. Our template helps you track your income and expenses simply and efficiently. With our easy-to-edit documents, you can Craft a budget that will improve your financial health.