The Importance of Having a Budget
Whether you’ve been actively managing your financial journey for a while now, or you’re brand new, chances are you’ve worked with a budget before. Budgeting is one of the most important and basic steps towards managing your money. There are so many benefits to maintaining a good budget, however we know that there are still many people out there who haven’t yet taken this first step.
Whether you think it’s too hard, or that you need to be richer to start a budget, we can assure you: it’s not, and you don’t. Budgeting is an essential skill for anyone interested in improving their financial situation.
Why is having a budget important?
In this blog post we’re going to go through four big reasons why you need a budget and how having one can help you achieve your financial goals. This is relevant to those of you who are just learning to budget, but equally to those of you who have perhaps just received a raise or come into an inheritance. When we come into a sum of money or a higher monthly cash inflow, it can be tempting to increase your spending as well. However, learning to live comfortably on a budget even when your paycheck goes up is an integral skill to healthily growing your financial situation.
Not only that, but some of the best things in life, such as weddings, a honeymoon, a newborn, or your first home, all cost a fair amount of money. Learning to maintain your monthly spending is the best way for you to be prepared for these life events, and therefore be able to enjoy them, without stressing about your wallet.
Some of the best reasons for budgeting are laid out below.
1. A budget puts you in control
Firstly, and most importantly: having a budget in place that you stick to puts you in control of your finances. This is such a crucial step to achieving your financial dreams. If you think of your financial journey as a house, your budget is your foundation- it’s what you need in place so you can build on. It has to be solid, and appropriate for the house you want to build.
It doesn’t mean you can’t have any fun at all, budgets should be designed to give you some spending flexibility- but within a reasonable percentage based on your paycheck!
2. A budget stops you spending
We’re all guilty of the occasional overspend, some of us more than others. When you’re unaware of your budget or how much you want to save the amount that you spend tends to be a lot higher than it would be without one. Having a budget makes you conscious of your funds, which means you are much less likely to overspend.
There are many different kinds of budgets you can have, one of the most popular being a “values-based” which means you organise your spending around what means the most to you. So if your values are health and fitness, your budget will be structured to allow you to spend money on health and fitness and cut down expenses in areas that don’t mean as much to you. This helps you achieve your goals while also living your values.
If your values is having the wedding of your dreams or a home deposit within the next 2-3 years, then perhaps you would end up saving a higher percentage of your paycheck.
3.. A budget helps you save money to reach your money goals
We all know that many of the good things in life come with a significant price tag: a holiday, a home, preparing for a new baby, a renovation. Without a budget in place that you stick to mindfully, reaching these goals can be made so much harder.
As you progress through your career and your earnings capacity increases it can be tempting to spend that extra cash. However, while this brings short term enjoyment it can lead to lost financial stability in the future. Try to keep your spending where it was before your raise and live within your means. For example, if you were earning $80,000 and then get a promotion to a $100,000 annual income, you could keep living off the same budget as you did on the lower salary. The additional cash that you have left over can be used to save for your goals or can be invested for long term wealth.
Get a good budget in place, one that you stick to, and reaching your financial goals will become so much easier and quicker.
How do I create a budget?
Contrary to popular opinion, creating a budget is actually very easy. Not only that, but it is also something you should redo frequently, to ensure its an accurate reflection of your current income and spending habits.
Whether it’s your first time or you’re coming back to a budget after a raise or a new family member, these are the steps to follow.
1. Record your income
The first step to creating a budget is to get an accurate picture of how much you’re earning, and how frequently you’re receiving those funds into your bank account. Are you paid monthly, fortnightly, weekly? At odd intervals? Make a list of:
- How much you earn,
- All your different income sources, and
- How frequently you get paid.
2. Add up your expenses
The next step in creating your budget is to get an accurate picture of how much you spend. Be honest with yourself here; the most accurate the figures the better you can tailor your budget.
First add up your fixed expenses, which could include (for example): rent/mortgage payments, household bills, council rates (if applicable), groceries, pet care, insurance, transport costs, car registrations, school fees, etc.
Next, list out any and all debts you have, and how much you pay. Your debts could be a personal loan, credit cards, or your mortgage.
Thirdly, don’t forget to include any unexpected or random expenses. These could be unexpected medical bills, car repairs or services, gifts for friends and family. You should include a section here to record how much you spend on fun or “splurge” activities such as eating out, drinks, or shopping for non-essential items.
3. Set your spending limit
Now comes the tricky part, setting your spending limit. Review your income and compare with your expenses. First, are you spending more than you’re earning? Or are you earning more and able to save? If you’re the former, you should aim to become the latter.
Set yourself a budget that means you spend less than you earn. Make a plan to cover your fixed expenses and debt repayments and see if you can minimise the amount that you may spend eating out, or on drinks with friends or shopping for new clothes or gadgets you don’t actually need. If you order UberEats every week- is that essential? Or can you eliminate that spending?
4. Set your savings goal
Now, on the flip side to setting yourself a periodic spending limit (based on how often you get paid), you need to set yourself a savings goal. How much can you save per week, per month, or per fortnight? And what are you saving for? Does your savings goal have a timeline? Are you saving or investing?
5. Adjust as needed
Don’t forget that your budget is there for you, it needs to work for you and your lifestyle. It can be adjusted as your situation changes.
For example, if your expenses start to increase you may need to look at reducing how much you spend, or perhaps if you cannot, change your savings goal. If you land a new job, you may look at increasing your savings goal. A budget is not a static concept, it is meant to be fluid and change to suit you, and your goals.
If you’d like some help with your budget, whatever stage you’re at, we’d love to help you! Reach out to us at Pursue Wealth and let’s see how we can simplify your budget and get you to your financial goals!