Why you need a budget

With a well-planned budget, you may be securing your future, Udeme Ekwere writes

For any individual or business owner, the gains of budgeting can never be over emphasised.

This is especially important in this era of tough economies where job losses are rampant, home values are low and wallets are tight. Due to some of these reasons, budgeting has become more important than ever.

A budget is a plan for the near future detailing saving and spending. It consists of a list of all planned expenses and revenues. It may include planned sales volumes and revenues, resource quantities, costs and expenses, assets, liabilities and cash flows.

Budgeting is the process of creating a plan to spend your money. Creating this spending plan allows you to determine in advance whether you will have enough money to do the things you need to do or would like to do. It is simply balancing your expenses with your income.

Experts say that if for instance you have dreams of buying a home, paying down debt, taking vacation, or having a comfortable retirement, planning is vital. And the first step to securing your future is to be aware of how you spend your money today.

Financial experts and money advisors enumerate a lot of reasons why budgeting is important to business growth and individual development. Below are some of the reasons.

Setting and reaching financial goals

A Business Consultant, Mrs. Bisi Shoneye, explains that once you understand the overall picture of your finances, that is specifically identifying how money flows in and out of your life, you can better see how to reach your financial goals.

She says, “Start by collecting bank, credit card, and income statements for the past six to 12 months, and also find out on the average, how much you spend monthly, and break down spending into categories such as food, gas, entertainment, monthly household bills, insurance, debt payments, medical expenses, and savings.

“It also pays to calculate and record exactly how much of your debt payments are going toward interest.”

“Once you identify whether you have a surplus or are in the negative each month, as well as where your money is going, you can formulate ways to improve your situation.”

She adds that you may also wish to create a timeline for reaching goals, such as paying off debt or saving for a vacation.

Spend according to your priorities

Experts add that a budget is essential in helping to assist with your priorities.

They note that if a business owner or an individual is in the dark about how much he spends and where he spends it, changing such habits will be difficult.

“Even if you’re financially comfortable, a budget can help you identify unnecessary expenditures and deduce ways to redirect funds towards your priorities,” Shoneye adds.

For instance, if you don’t realise you spend N20,000 per month on snacks, it will be much harder to break that habit and apply that money toward a priority, such as saving for retirement.

Most importantly, if you’re trying to get out of debt, it is essential to budget your limited funds to make debt payoff a priority. To cut back on expenses, you need to first see where your money is going so you can then limit yourself to a specific amount per spending category and utilise a method, such as the envelope budgeting system, to be sure you don’t overspend.

Build wealth

Budgeting assists to create and increase your wealth. Once you have a clear view of your overall financial picture, you can shift your focus to aggressively eliminating debts and building wealth.

As your savings and investments build, you are able to generate a passive income from interest payments and capital gains while still using your actively generated income to budget for monthly expenses.

In other words, you can increase your total income simply by being smarter about how you use your regular paycheck.

Plan for retirement

Though technically an aspect of building wealth, retirement planning is so vital to your future that it warrants special attention.

As important as it is to spend your money wisely today, it’s also critical to save for your future.

A budget can help you do just that. It is important to build investment contributions into your budget. If you set aside a portion of your earnings each month to donate to your other retirement funds, you’ll eventually build up a nice, fat nest egg. Although you may have to sacrifice a little now, it will be well worth it down the road.

Also, plan to have a surplus for when you retire. Believe it or not, money will mean a lot more to you when you have less of an ability to earn it.

For peace of mind

If you do not have a budget, you might not know whether you can afford a new flat-screen, a new car, or any other major purchase. In fact, if your finances are one big mystery, your mere desire for an item might alone justify the expense.

It never hurts to have a little extra money in your emergency fund, and budgeting can help you save more so you can sock away extra cash for a rainy day.

Creating and following a budget involves self-discipline and sacrifice, but will help you develop wise spending habits to better manage your finances now and into the future.

Experts advise on keeping your budget current by updating it regularly to reflect changes in your situation, such as a raise, marriage, or new home as well as experimenting with different applications to help you stick to budget, like the envelope budgeting methods listed above.