Why a Budget is Important

Budget. To many people, this sounds like a four-letter word. Budgeting limits your spending, and keeps you from being able to enjoy the spontaneity of life. After all, if you have to stop to check your budget before any purchase—even minor ones—how can you have any fun?

This is a common misconception regarding budgets. In fact, having a budget can allow you to be more confident in your spending, even when it involves a spontaneous event or purchase. It’s all about the planning.

budget to be debt free

Having a well thought-out, workable budget is vital in keeping you out of debt. The best way to avoid debt is to know exactly what your income is and where your outgo is going. A budget puts all that information right in front of you, so you know when and where you’re overspending, where you can cut back, and how much you can afford to set aside for spontaneous or emergency spending. Your budget keeps your spending realistic and under control. Once you’ve fine-tuned your budget based on your particular spending patterns, you’ll never have to worry about debt again.

Video: Household Budgets

Budget Basics

Everybody needs a budget. Even the Federal government uses a budget—although, given their tendency to overspend, they might not be the best role model.

You don’t even need any complex tools to start your budget. A simple spreadsheet program like Microsoft Excel can get you on your way. All you have to do is prepare a column for payments coming in, spending going out, and a formula to determine if your spending is a smaller amount than your income. The Microsoft site offers downloadable templates for an Excel budget spreadsheet, saving you even more work.

create a budget

A budget should also incorporate your personal debt. This includes credit card bills, outstanding loans, etc. If you’re trying to reduce your debt, include payments toward this goal in your budget items. If you budget a certain amount toward each payment every month, you’ll be more likely to pay down those debts rather than letting them slide or, worse yet, adding to them.

Your overall goal, then is to reduce your personal deficit and work toward a personal surplus. If you finish each month with a negative number, you’ve spent more than you earned. This is considered a deficit. If you end with a positive number, you’ve got a surplus. This can be directed toward savings or used to make an additional payment on a bill.

Speaking of savings, it’s very important to include this as an item in your personal budget. Just as with your bills, if you’re consciously including savings in your budget, you’re much more likely to put that money aside. Too often, savings is left as an afterthought—if you have anything left over, you’ll put it in savings. Of course, without a budget, you probably won’t have anything left over, and that part of your financial health will fall by the wayside.

Video: How to Make a Shoebox Budget

It’s a good idea, too, to figure a surplus into your budget if it’s at all possible. Try to arrange your payments so you’ll always have a little left over every month. This will help if you run into an emergency, such as a medical bill or unexpected car repair. You can also set it aside in a “mad money” fund to cushion against those spontaneous purchases.

Of course a budget can’t be set in stone. If your financial situation changes, you’ll have to shift your budget around. The recent exponential increase in gas prices undoubtedly forced many people to adjust their budgets to accommodate these unexpected expenses. Ideally, you’ll reevaluate your budget because you’ve gotten a raise, or a better paying job. But you might have to reevaluate due to a job loss or pay cut. Either way, with a budget in place, you’ll be prepared.