Why You Need a Budget!

by Khaleef Crumbley on June 30, 2010

in Budgeting

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If I asked you to tell me how much you spend eating out or buying gas each month, could you tell me? What about your household’s true cost of living?

This is the most basic reason to have a budget. Most people who come to KNS Financial for help have no clue how much they spend on a monthly basis. All they know is that by the end of the month, their bank accounts are nearly empty and they are waiting for their next paycheck.

In order to take control of your finances you need to come up with a plan. This means assigning a job to every dollar that you receive before you ever receive it.

So, you need to create and update a budget in order to keep track of your spending. This goes both ways – if you don’t keep track of your spending, then creating a budget is pointless. You have to periodically evaluate your spending to ensure that you are staying on track.

Here are some specific benefits to having a budget…

To accomplish a financial goal:

It will be nearly impossible to accomplish a financial goal without a budget – of course it can be done, but with a lot more hassle and waste. With a budget, you can set a specific amount to your goal – whether it be savings or debt repayment – and ensure that it is reasonable.

It will also be easier to accelerate your plan by reducing spending in one or more areas and funneling that money into your “main goal”.

It will help us handle “shocks” to our finances:

If you find out today that your job will be cutting your salary, or implementing furloughs (mandatory, unpaid days off), how would you handle it? Would you be able to make the necessary adjustments?

If you keep track of your spending (which will be necessary to follow a budget), it will be easy for you to make these adjustments. You will be able to look at every area of spending and determine where you need to cut back – or even if it’s worth it to try to increase your income.

To identify areas of waste:

Most people who make small daily purchases (like coffee, breakfast, or lunch), are shocked to see how much they’re really spending in these areas. It’s easy to spend $4 on a cup of coffee and a bagel in the morning, $2 on a candy bar and soda from the vending machine, and then spend $6 on lunch without even thinking about it.

However, if you have established a budget, it will become increasingly difficult for these expenses to escape your attention.

The first month after you set up your budget will probably be a big eye-opener for you (it definitely was for me). Remember that coffee, candy and lunch from above? You would probably budget about $50 or $75 to that category. However, 22 days of that type of spending will cost you $280 every month!

Committing to (and adjusting when necessary) a budget will help you to evaluate this type of spending and decide if you should divert money from another category, or change your habits!

To ensure that any surplus is not spent on frivolous items:

Similar to looking for areas of waste, this will call for you to identify areas where you can reduce or  eliminate spending. Once you allocate your income across living expenses, giving, debt repayment and savings, you may find that you have money left over (a problem that we all would love to have).

Instead of this money just being absorbed into your spending (something that usually happens without a budget), you will be able to give this surplus a new assignment. This, of course, depends on your exact situation and level of risk aversion.

You may choose to give more, accelerate your debt repayment, increase your savings, or master your investment strategy. The point is that having a budget will easily allow you to identify these opportunities.

It will help you develop discipline:

This is accomplished in a few ways. First, you are forcing yourself to tightly control your spending, which will call for discipline – especially if this is the first time you have done this.

Secondly, by constantly monitoring your finances and having to make small adjustments, you are more aware of every financial decision you make.

By holding yourself accountable for every dollar that you spend, you will tend to evaluate your free time in the same manner.

These are just some of the reasons why you need to develop a budget. Over the next few days, we will look a few painless steps you can take to create a budget, and also to change your thinking about money!

What are some of the benefits that you see in having a budget? How often to you review your spending to ensure that you are within your budget? Have you ever discovered that your budget was unrealistic?

I look forward to your comments.

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photo credit: Casey Serin

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{ 14 comments… read them below or add one }

1 Listen Money Matters

True, keeping track of what you spend is half the battle. It’s very hard to cut back when you don’t know where to start!

What kind of tools do you use to budget? Just a spreadsheet? Quicken?

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2 Khaleef Crumbley

Currently I used a combination of Quicken, MS Excel, and Mint.com. The process is not as simple as I would like it to be, but it works for now.

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3 Buck

Great article. I totally agree with keeping track of spending and following a budget. I may need to be a little more granular. I have a general idea of my income and expenses, but I can’t tell you I spend X dollars a month on coffee. I should add this to my resolutions. Thanks! :)

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4 Khaleef Crumbley

It can become very easy to let things slide, when everything seems to be under control. As long as there are no major financial problems, we don’t really focus on details as much – however, that can be a mistake!

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5 Tim @ Faith and Finance

These are all great reasons for budgeting. I think people get discouraged about budgeting because the numbers don’t always fit and it seems like a problem that won’t ever get corrected. The reality is that when you budget, you realize what’s necessary and what’s not and you can make adjustments much easier.

Great job!
Tim

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6 Khaleef Crumbley

Good points, Tim! I really hope that people will become less intimidated with budgeting and taking control of their finances.

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7 Get Happy Life

I am making efforts to make budget for shopping first. I decided to buy 1 item per month and spend not more than 50 % of what I plan to spend during the whole month on clothes. Luckily I spend only 20% of what I earn so 50% is not that much, but it’s progressive.

I am having difficulty of making a good Excel sheet for my cashflow. Can someone help me ?

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8 Khaleef Crumbley

It sounds like you are in good shape as far as expenses are concerned.

Excel actually has a lot of templates for budgeting and projecting cash flow. I would suggest looking at those first and just tweaking them to fit your situation. If you still need help, just sent me an email: http://knsfinancial.com/contact-us

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9 Charlie@Christian Dating Sites

Very good article and I do agree there are alot of people out there that do not have a budget and wonder at the end of the week or month where all there money went. I have a friend he has filed chapter 13 bankruptcy 3 times. I asked him what do you do with all your money he said to me he does not know. I told him well there is your number one problem start tracking how much you spend and when you see areas that need improvement work on those areas. Good post keep up the good work.

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10 Khaleef Crumbley

Thanks! I hope your friend listens to you this time! I don’t think someone should be allowed to file for bankruptcy that many times. They should be mandated to see financial guidance before the first filing is granted!

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11 Everyday Tips

You are so right that people probably wayyy underestimate what they spend money on for lunch and other miscellaneous items. For instance, I had lunch at Panera today and it was 10 dollars. That’s crazy. (But it was good.) Fortunately, that is not a daily expense, but it definitely adds up. Do that weekly and it is 40 dollars, and that doesn’t count all the other meals, snacks, etc.

I agree that a budget almost keeps you honest, and you will save much more effectively if you know what you are spending on, and how much you really need to spend. As is true with everything, you need to know what your trouble spots are to create an attack plan.

Great post.

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12 Khaleef Crumbley

Yeah, I definitely think that it is almost impossible to make it without a budget. There are too many people/companies/ideas all vying for a piece of our paycheck, and we need to be better prepared in order to wisely spend our money!

Thanks for the comment!

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13 Joe Plemon

Khaleef,
All great reasons for budgeting! I too have discovered that most people don’t have a clue how much money they spend on food and gasoline. Getting those two items under control is a giant step toward better money management.

Keep up the good word!

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14 Khaleef Crumbley

I agree, I like to know where every penny is going, but just tracking basic items and making adjustments would help most people!

Thanks for the comment and the kind words!

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