The main reason why we create a budget is to meet various financial goals. As we have seen thus far, creating a budget calls for us to carefully track our income and expenses in an organized way. Doing this will allow us to either change our spending habits or increase our income appropriately in order to meet our goals.
So, what are some common, SMART goals that people set when creating a budget?
Get out of debt
Becoming free from debt is probably the most frequently cited reason why people desire to create and live on a budget. Contrary to popular belief, all debt is bad and it hinders you from having financial freedom. So, getting out of debt should be your number one financial goal – provided that you at least have a cushion in your checking account.
By monitoring your spending and setting limits, you can easily make cuts and adjustments in order to funnel more of your money into debt repayment. Having a budget will allow you to see the impact of every dollar of your spending – especially because we tend to underestimate our expenses when we don’t have a budget. This site from the UK has some great budgeting advice.
Build an emergency fund
Although there are a few financial advisors who don’t see the need of an emergency fund, most agree that it is an essential part of a healthy financial profile. An emergency fund is exactly what it sounds like – money that you have set aside strictly for emergencies.
These “emergencies” can range from needing a new furnace, having to replace the engine on two cars within a month, or a serious medical bill that your insurance will not pay, to covering your living expenses if you lose your job. Wanting a new pair of shoes should not make this list!
Now, the amount of this fund will differ depending on your circumstances, but a rule that I like to follow is that once you are out of debt you should be able to cover one year of living expenses with the amount in this fund.
If you have children, an older house, a car (or cars) that constantly need repairs, or you are barely getting by on two incomes, you may want to increase this amount. This is also true for those who have unsteady or infrequent incomes – such as artists, musicians, salesmen, etc.
If creating or building up an emergency fund is your goal, having a budget is essential.
Save for a large expense
Many people employ budgets to help them save up for a large expense. If you have plans to purchase a car, house, boat, or even go back to school, it is imperative for you to set up a budget.
A budget will allow you to divert funds into a separate account in order to save for these purchases. If you attempt to do this without a budget, you run the risk of putting your account into an overdraft (because you are not keeping track on your monthly expenses), or being inconsistent with your saving efforts.
Put money aside for retirement
There are many ways that you can save for retirement. They range from IRAs, 401k’s, 401k alternatives, 403b’s, and stuffing money in your mattress (okay, scratch that one). Most of these options would allow for automatic transfers from your checking account, or even direct deductions from your paycheck.
Building retirement savings into your budget is the only way to ensure that you will not be a Wal-Mart greeter, during your sunset years…
Identify areas for giving
One of the best things about creating a budget is that it can help you identify areas of frivolous spending. Evaluating your expenses will allow you to plug up the holes in your budget, and free up that additional money for something much more important.
Many of us desire to be able to give money to church and other charitable organizations, but we have a hard time finding the money to do so.
Creating a budget will allow us to eliminate waste so we can support our priorities. So, if you desire to give, create a budget!
Save for a child’s education
This is another very popular and noble goal. However, it can be made difficult without a budget in place!
Saving money for college usually doesn’t get the same priority level as some of the other items mentioned above, but it is still important. The great thing is that if you set aside a small amount of money early and consistently, you can still be successful.
Needless to say, a budget is essential for doing this. Starting with $25/month when you first learn of your new “bundle of joy” and increasing this amount when able, can pay off big down the road. Of course, to squeeze even more out of your finances, you need a budget!
The point of this list is to suggest a few goals that you can plan for with your budget. I’m sure that you can think of many things to add to it, but this is a good place to start!
What are some of your financial goals? Do you use a budget to ensure progress?