I won’t be surprised if there are literally millions who don’t know the reasons why you should prepare a budget. These people are more content in just spending money without following any budget.
As far as they are concerned as long as they pay their major expenses then they don’t need any budget.
It is no surprise therefore to learn that American households who have credit cards carry on average $8,398 in credit card debt. Not long ago consumer debt stood at $13.86 trillion.
There are actually 189 million Americans with credit cards, no wonder why we have this huge indebtedness.
I won’t be surprised if the cause of most of these debts is the fact that most of us don’t bother to prepare a budget.
Reasons Why You Should Prepare a Budget
In the following paragraphs, I am going to present some reasons why we should all prepare budgets as individuals or families. It is my sincere hope that once you finish reading this article you will seriously consider starting to prepare a budget.
1. It Is The Easiest Way To Control Your Finances
If you ever want to get a handle on your finances then you need to start budgeting. It is one of the oldest tools that has stood the test of time.
As an accountant, I can tell you that no serious company or organization operates without a budget. The budgeting process is taken seriously in any organization.
All the managers will make sure that all their departments have provided all the information need to prepare the budget.
The reason why companies take this task seriously is that this is one of the ways they control their finances.
Even for governments, the presentation of the annual budget is one of the most anticipated days in the parliamentary calendar.
A budget in the civil service is taken more seriously than in the private sector where budgets are not followed as closely as in the government.
In the private sector, companies will not wait for the revision of the budget if opportunities arise. The budget is seen in the private sector as a guide and something to restrict them at all times.
In the civil service, there is no such leeway. You observe the budget strictly without exception.
We too need to learn from how companies and organizations use budgets. It is important that we too need to learn to use budgets to control our finances.
One cannot effectively control their finances without a budget.
However to be able to achieve control, one needs to follow their budget.
One way others use to make sure that they follow their budget is through the use of the cash envelope systems categories. This is a system where you keep track of budget categories by tucking away money for each category in an envelope.
In this way, you only spend the money that was allocated to a category as you are not allowed to dip into other envelopes.
2. Budgeting helps you to avoid unnecessary debt
I already started talking about this in the opening paragraphs. And as I pointed out most of the debt that consumers owe financial institutions is, to be honest, the result of lack of planning.
If people took their time to sit down and plan their expenditures, they would avoid most of the debt that we owe.
This is because once you start planning or to be clear, to budget you will be forced to make sure that you spend within your means.
And because you are living within your means there would be no need to carry debt unless you meet unforeseen emergencies.
3. Budgeting will help you to meet your goals
If you have goals in your life then the best way to meet those goals is to start budgeting. This is because you will use the budget as a tool to help you to meet your goals.
For example, if your goal is to buy a motor vehicle, then you create a sinking fund in your budget for this expense. In this way every month you will be saving money to meet this goal.
Without a budget, it will be difficult to be able to set aside any money. I have been in a situation where you spend money without a budget and as a result struggle even survive as you approach month-end.
Struggling not because you are getting peanuts at work but because you just spend without any guide or plan in place.
Therefore if you have any goals there is no better way to meet those goals than through a budget.
4. Budgeting Helps in Accountability
In this world, we are all accountable in various ways to ourselves and to others. There is no better objective tool to help in accountability than through a budget.
A budget sets limits on your finances and therefore makes you accountable to yourself or your family.
This is because at the end of the period or even during the period you will have to review how you have spent or are spending your income. And the budget will serve as the tool to see if you kept to your promises and limits.
Without a budget, there cannot be any real accountability. This is because you cannot be accountable for something you don’t know.
5. Budgeting Can Help You Prepare For Emergencies
One thing that is certain in this world is emergencies. These can be medical emergencies, funeral emergencies, etc. And because of this, we have no choice but to prepare for them or else we will be caught unprepared.
The way to prepare for emergencies is to set aside money every month or whatever period you choose for them. If you do this you will at least have a little something to fall back on during those emergencies.
It is embarrassing to see grown men having to request assistance from friends and family for things that could easily have been prepared for.
To avoid such situations we all need to create a budget category for emergencies.
You will then have to put this money that you put aside in a savings account preferably. This money will not be touched for any other reason other than for emergencies.
If you are doubting the fact that most Americans don’t plan for emergencies, then consider what has happened during this pandemic.
You only have to look at the long queues outside food banks to know how serious this.
Most people who lost their jobs do not appear to have had any savings to cushion them at such a time.
Had the government not intervened things would have been worse.
I guess time has come for the government to consider encouraging people to start saving their money.
This life of depending on credit cards is not sustainable. Sooner or later this lending bubble will pop and we will have a huge crisis on our hands.
This reminds of the subprime lending scandal when people with poor credit were granted mortgages which they latter struggled to pay back.
6. Budgeting Helps You To Be Flexible In Your Spending And Savings
I realize that this statement is in contradiction to my previous statement on the Cash Envelope System where there is no flexibility. Under the Cash Envelope system, you are not allowed to move money from one envelope to another.
In theory that helps in improving financial discipline but reality budgets are not perfect and may need to be adjusted throughout the month.
This is what companies do as they go throughout the year. And I think that should also be the way individuals operate.
Circumstances may change as you go through the month. Such that you may be forced to move around the money from one category to the other.
For example, you may have budgeted for $20 in public transport only to discover that the fares have gone up by $10. In this case, you will need to move $10 to this category.
In the case of public transport, one may not have much of a choice if he uses public transport to go to work. It will be an unavoidable expense that cannot simply be wished away.
It is such kind of circumstances for which the cash envelope system may not work.
7. A Budget Can Help You and Your Family to Have Common Goals
If you want your family budget to work properly you need to engage all members of your family. And in doing this together you will end up setting common goals for your family.
This will in turn help to improve family cohension as you will all be pulling together.
Budgeting together with your family is also a good way to make sure that the budget is followed. This is because everybody is part of a team with the same goals.
And as you have the same goals, you will all be accountable to each other. It will not be just the father controlling everything.
In this case, even the children will participate and will understand why certain things cannot be bought.
As the budget is prepared you need to make sure that even the children’s needs are considered during the budgeting process.
This will not only help the family as a whole but will also teach the children some financial discipline.
Your children cannot come back to you and ask you to buy something not included in the budget that you put together.
8. A Budget Can Help You Stop Bad Spending Habits
I know from my experience in this world that I sometimes end up buying things that I really do not need. And when you have no budget such kind of behavior can go on without any push back.
When you decide to start budgeting then all of a sudden you will be forced to seriously consider such expenses. In this way, the budget will be like a tool to stop bad spending habits.
Having a budget also offers you an opportunity to also go back in time. It is therefore ore not just concerned with the time you are preparing it.
Otherwise, if you just prepare a budget and then forget about it then it will not be a very useful tool.
A good budgeting system should compel you to look back and review all your expenses. It is during this time that you may be forced to review some of these bad habits.
9. Budgeting Together Can Build Your Family
One of the reasons why most families are struggling nowadays is through lack of communication. A situation where each member of the family focuses on his needs and his alone.
I know of families where the people rarely communicate with each other. They are too busy playing games on their mobile phones or just watching the TV.
And because of this lack of communication, members of the family start drifting away from other members of the family.
We may not notice it now but after a few years, the fruits of our labor or lack thereof will begin to show.
This is where the budget preparation can help to improve communication and as a consequence improve the health of the family.
All this is because during the budget process all members will be forced to speak to each other as they discuss it.
Even the children will be able to tell their parents what they expect as children from the budget.
There is no better way to improve the love and welfare of your family than through such kind of communication.
This marks the end of this post. I hope you now understand the reasons why you should prepare a budget. May you not just be interested in the reasons but let them cause you to start budgeting.
People who end up on the losing side usually end up there because they are listeners but not doers. It is only through action that you will be able to achieve anything in this world.