Many of us associate budgets with being an annoying part of managing our financial lives. At worst, some of us think of budgets as a major constraint on how we would like to live our life. But a deeper understanding of the purpose of budgets might make sticking to it a bit more palatable.
Let’s explore the many purposes of budgets. Hopefully, you’ll walk away from this article with some motivation to start or stay on budget!
What is the purpose of budgets?
The most basic purpose of budgeting is to track your income and expenses. Through a budget, you might monitor how much cash is flowing in and out of your household.
Beyond basic tracking, one of the purposes of budgeting is to help you plan your money goals and manage your funds to hit those goals.
Without a budget in place, it’s all too easy to prioritize what’s right in front of you over your future financial security.
For example, a budget can include a line item for sinking funds. If you set aside a certain amount of funds every month, you’ll have those savings to fall back on in an emergency. But it’s often very challenging to save for unforeseen emergencies without a set budget to guide you.
11 reasons you need a budget
A recent survey from Mint discovered that around 65% of Americans weren’t sure how much they spent in the last month.
At the same time, a survey from Debt.com found that 85% of respondents have used a budget to keep themselves out of debt or pay off debt.
For those that don’t stick to a budget, the reasons included taking too much time, feeling anxious about budgeting, not having enough income, and a source of conflict between partners.
Whether you currently stick to a budget or not, many reasons might encourage you to stay on top of a budget. And if you struggle with answering, "what is the purpose of budgets?" below you’ll find a look at eleven key reasons why you need a budget.
1. Track spending
First and foremost, a budget helps you keep track of your spending. When you keep tabs on your spending, it’s easier to stay on track toward your financial goals.
Impulse spending is less likely to happen if you know it will be recorded in your budget.
How to keep track
Perhaps the most important purpose of budgeting is to stay on top of your expenses. Within your budget, you’ll need to keep a log of the purchases you make. While you can keep track with pen and paper, there are automated spending trackers out there.
Personally, I like to use a spreadsheet to keep track of my spending. At the end of every month, I can see exactly how much I spent and where all of the money went.
2. Track income
On the flip side of tracking your expenses, one of the purposes of budgeting is to help you track your income. After all, you cannot keep spending unless you have money coming through the door.
When first building your budget, you’ll typically work backward from how much you make.
For example, if you have $3,000 in income per month, you would divide that over your spending obligations and savings goals.
Tracking income can reveal that you need to earn more
But in some cases, tracking your income will illuminate that your income is too low to make ends meet. Although this discovery can be disheartening, uncovering an uncomfortable gap between your expenses and your income is critical.
Once you understand the gap, you can start building your income by pursuing raises or creating other income streams.
3. Plan out savings goals
Whether you’ve labeled them or not, everyone has savings goals. For example, saving for a luxurious vacation, retirement, or a new vehicle all count as savings goals. You likely have your own unique savings goals.
It’s often easier to make progress toward these goals by including them in your monthly budget. When you map out a budget, consider including a set amount of money for your goals.
For example, you might choose to dedicate $100 per month toward a down payment on a house. Whatever your savings goals are, the purpose of budgets is to present a pathway to achieving them.
4. Take control of your finances
Without a budget, it’s easy to let life happen to your finances. Life without a budget can be more difficult than it needs to be.
For example, many feel the pressure to overspend around the holidays. Although the holidays come around at the same time every year, it’s easy for these expenses to sneak up on your budget.
With a budget in place, you can include a holiday sinking fund for the festivities.
So if you're wondering "what is the purpose of budgets?", it is to help you plan for future expenses. Instead of just getting through today, a budget can help you think about tomorrow.
5. Financial freedom
When you think of a budget, you might start to feel constrained. But the reality is that with the right mindset, one of the purposes of budgets is to provide financial freedom.
A carefully thought-out budget gives you the freedom to spend within those limits.
Examples of financial freedom
For example, you might set a discretionary purchase category in your budget. The next time you head to the store, you won’t have to feel guilty about making a purchase that fits within those boundaries.
Beyond freedom from spending guilt, a budget can help you move toward financial freedom. If you set aside money each month, you might break the paycheck-to-paycheck cycle or even retire early at some point.
6. Track your progress toward financial goals
Financial goals come in many shapes and sizes. Depending on where you are in your financial journey, your goals will look different.
A few popular financial goals include paying off credit cards, eliminating car loans, building an emergency fund, and saving for retirement. But everyone can set up a financial goal for their unique situation.
A key feature of budgeting is the ability to monitor your progress toward long-term financial goals. With the help of your budget, you can stick with your savings strategy to make your financial goals a reality.
7. Highlight wasteful spending
One of the purposes of budgets is to help you highlight wasteful spending.
For most of us, wasteful spending creeps into our lives over time. Whether we spring for extra clutter that turns into junk around the house or overspend on things that don’t matter to us, most of us will spot some level of wasteful spending.
Understand what categories you typically overspend on
While a budget might not totally eliminate wasteful spending, it can help you uncover what categories you are likely to overspend within.
Personally, I tend to overspend on food during busy periods of my life. When I notice that my food spending is growing too fast, it’s a good reminder to slow things down and get back into my meal-planning routine.
When you spot overspending, don’t feel guilty. Instead, try to move forward with less wasteful spending next time around.
8. Lower financial stress
Financial stress can put pressure on everyone in the household. But without a budget, it’s easy for financial stress to get out of control.
Essentially, the purpose of budgets is to help us understand how much we can afford to spend in any given category. Without these guardrails in place, it’s all too easy to overspend on something that just doesn’t fit in the budget.
Unfortunately, overspending outside of our budgets can lead to taking on debt. Luckily, a proactive approach to managing your finances with a budget can help you avoid stress.
9. Increases financial communication for couples
Managing money as a couple has its challenges. The purpose of a budget for your household is that it can serve as a neutral tool for both parties to understand the situation better.
With the help of a shared budget, both partners can see how their spending affects the household. Instead of one partner pointing out the issue, a budget can lay out the problem in black and white. Typically, a budget is a good place to start money conversations as a couple.
10. Assess spending triggers
When you are tracking your purchases through a budget, you can look over the expenses with a clear head. Sometimes, you’ll be able to spot your spending triggers.
For example, you might notice that you head to the store after a bad day at work. As you start to recognize the signs, you can make small changes that could really impact your financial situation.
11. Match your spending with your values
When you build a budget, you have the opportunity to spend your money based on your values.
Within your budget, you can choose to spend money on the hobbies and experiences that matter to you. Plus, you can cut out things that you don’t want to support.
A value-based budget can be a game-changer for your budgeting mindset. Instead of feeling trapped by a budget, choosing to align your spending with your values can help you feel in control of your budget.
The purpose of budgets is to stay in control of your finances!
When you set a budget and stick to it, you are taking control of your financial situation. You can use your money system to work toward your long-term financial goals.