Creating a budget may not sound like fun. It may not even sound like something you need. After all, maybe you always pay your bills on time, have food on your table (and a stockpile in your pantry), and you may even have enough left over to have a fun date night once in a while.
So why do you need a budget?
Budgeting doesn’t have to be the restrictive, boring plan that only nerds use or people struggling to make ends meet need. Everyone, whether you’re a millionaire or broke, needs to have a budget.
What is a budget?
According to the Merriam-Webster dictionary, a budget is a plan for the coordination of resources and expenditures. It is also the amount of money that is available for, required for, or assigned to a particular purpose.
A budget is simply a plan to tell your money where to go. It’s not even necessarily a way to track your expenses, although that’s part of budgeting. A formal budget is simply a way for you to tell your money how you want it to work for you.
A budget can help you organize your daily finances and make sure that you have enough money to cover all your bases (like paying your bills, buying groceries, and buying your growing kids new pants so they don’t have to wander around in high-water pants).
It can also help you reach your dreams. Want a new kitchen? Want to take the kids to Disney World next year? A budget can make sure that you’re on the right track, and it can make your dreams a reality.
Why is budgeting so important?
I worked as a bank teller for a year and a half while I was in college, and it always surprised me when people would want me to balance their checkbook or ask how much they had spent on their debit card. I loved helping them with their balance, but it made me nervous!
The information that is in the bank’s computer only includes what people already spent, not what they still have to pay. Worse yet, the information that I had at the bank may not have been accurate!
Many retailers like gas stations and hotels simply put a hold on the account for a random amount, such as $1. In a day or two, the hold will then come off and the actual charge will be withdrawn from the account. If people don’t track their accounts closely, they could easily overdraw them, resulting in huge fees and unpaid bills. Even if the customers had overdraft protection, they could still pay unnecessary fees.
The process of never knowing how much money you had or needed seemed silly (and expensive) to me. I vowed then to always know exactly how much money I had and how I needed to spend it.
When I first created my budget, I used Microsoft Money, which was a free program that came with my computer. I then switched to creating my own budget in Excel, and then I purchased Quicken a few years later. I also recently tried You Need a Budget and Quicken for Mac (read my review of different budgeting software here).
Why do YOU need a budget?
Regardless of the budgeting method that you choose, it’s important to be able to track your past spending as well as know what bills and purchases you need to make in the future. Your budget is the perfect place to start planning for your dreams, like a new kitchen, new furniture, and a family vacation.
When I worked as a financial advisor after college, one of the first things I always discussed with people was their dreams for the future. What did they hope to accomplish with their money in the future? What did their dream retirement look like? What would they do if they didn’t have any debt?
I would then help them create a plan to achieve those dreams. How would we pay off their debt? How much would they need to save every month to live their dream retirement? What if something catastrophic happened in the meantime?
Your budget should be that “dream plan.”
Creating a budget is like drawing a blueprint for your dream home. Your budget tells you the exact dimensions and what your dreams will look like. It tells you what materials you’ll need to achieve your dreams. Your budget will also help you see exactly what you’ve already completed and what still needs to be done.
For more information on starting or updating your budget, check out the posts in this series:
- Why you need a budget
- What you should include in your budget
- How to create a budget framework
- Which programs and tools would be best to create your dream budget
- What to do when your budget doesn’t work.
Join me on a journey as we create your dream budget!