Why is the budget prepared: Purpose of budgeting

A budget is telling your money where to go, instead of wondering where it went.

John Maxwell

A budget helps you to keep track of your income as well as spending habits. It also helps you to save and invest for your future. 

If you want to learn about the basics of budget and the process of budgeting do check out our article on What is a budget: The process of Budgeting. It will help you to get a better understanding of the terms related to budget and the budgeting process.

In this article, we will discuss why the budget is prepared, from an individual’s perspective.

So let’s begin!

Why is the budget prepared?

A budget has a lot of importance in an individual’s life as well as in any business firm. We will be focusing on the objectives of having a personal budget in any individual’s life:

  1. Finding all your income sources: Budgeting helps you to find all your sources of income. You may be getting your salary, rent payments, dividend income, interest income, etc. With the help of budgeting, you can keep a record of all these income sources. It will help you to channelize your income in a better way to cover your expenses as well as save or invest for the future.
  2. Tracking your expenses: It is very important to track all your expenses otherwise at the end of the month you might think where did all of your money go? By tracking your expenses you can also get rid of any bad spending habits. This might save a lot of your money.
  3. Control your spending habits: The key to utilizing your money wisely is developing good spending habits. A budget will definitely help you do it. By tracking all your expenses, you can get an idea of how much you spend on different things. By analyzing your expenses, you can cut short your spendings on certain unnecessary things. It will not only develop good spending habits but will also save you a lot of money.
  4. Pay off your debts: Paying off your debts is a very crucial step to attain financial freedom. While preparing a budget you can channelize your income to your debt payments. This way you can keep a record of all your debt payments. It will help you to make your debt payments organized as well as regular. And ultimately it will also help you to pay off your debts faster.
  5. Making good financial decisions: Financial decisions cover matters such as income sources, expenses, money management, savings, building an emergency fund, paying off debt, investing, etc. Now the question is how will a budget help you in making good financial decisions? Following a budget wisely will help you to make better and informed financial decisions as they will be based on your present financial conditions. It will also ensure that you are investing regularly for your future and long-term growth. 
  6. Prepares you for any emergency: You can also include the column of emergency funds in your budget. Adding some amount of money to your emergency funds regularly can help you to tackle any unexpected situations easily. Emergency funds are crucial to ensure that you have a backup if any problem arrives suddenly. To be practical such situations do come in life. So why not be prepared for such unexpected situations beforehand? An emergency fund will ensure that you don’t withdraw money from your regular expenses for any such unexpected situations. 
  7. Helps you to build a better retirement plan: You might think to have a comfortable lifestyle after your retirement. Isn’t it amazing if you can save for your retirement plans while you are working? You can make a column of retirement planning in your budget. Then contribute to it regularly for the lifestyle you wish to experience when you retire.

Closing thoughts

I hope this article helped you to understand the objectives of budgeting and the importance that budgeting has in your life. Do take full advantage of budgeting to utilize your money wisely. 

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