Why Is Budgeting Important?

Brent Wiblin, Senior Managing Director, First Republic Bank
December 27, 2021

  • A budget is a tool that tracks your spending and can help you save money.
  • Budgeting can help you put aside funds to reach both short- and long-term financial goals, such as making a large purchase like a home or a car or saving for college tuition or retirement.
  • To help you save money, it’s important to adjust your budget over time in response to changing circumstances.

There are many upsides to the budget planning process including being able to allocate more money toward savings goals and managing or minimizing monthly expenses. Overall, budgeting can help improve your short- and long-term financial habits, help you with managing debt and saving money and enable you to reach your financial goals.

Understanding the purpose of budgeting, the steps involved in a budget planning process and the benefits that come from creating a budget can help set you on the right path to better financial health and savings.

What is the purpose of a budget?

Individuals create budgets for a variety of reasons. Often, a budget will help you track and organize finances so you can understand where your money is going, earn interest on your funds and effectively work toward your financial goals.

Save toward short- and long-term goals

The budgeting process generally begins with having a specific financial goal or set of goals. Goals can vary depending on the individual and can also be short- or long-term.

Short-Term Goals Long-Term Goals
  • Buy a car

  • Build an emergency fund

  • Pay for a wedding or other celebration

  • Save for a vacation or trip

  • Pay off credit card debt

  • Pay off a mortgage

  • Save up tuition money

  • Buy a home

  • Start a business

  • Save for retirement

Different goals will appeal to different people depending on their lifestyle and personal aspirations.

Increase savings

Building up savings to hit a financial goal is another reason why creating a budget is important, since budgeting can help you save money, enabling you to put aside funds into savings. As you begin to build up savings, you will need to choose between the various types of savings funds where you can store your money. 

For long-term goals, such as college tuition and retirement funds, examples of where to place your accumulated savings include 529 plans, IRAs and 401(k)s. For shorter-term goals, such as growing a rainy-day fund and building an emergency fund (a cushion of money set aside for unexpected expenses), savings and money market accounts can be helpful.

Manage debts and improve credit

Knowing exactly where your money is going each month can reveal how much extra you have — or don’t have — to spend. 

Without monitoring your expenditures, you may risk overspending on credit cards. It’s easy to swipe a credit card on impulse, but you may end up with a high statement you cannot account for at the end of the month. Having a budget can help mitigate unwanted surprises and prevent you from spending more than you wanted, since budgeting helps you get a sense of where you’re spending your money and what types of expenses you’re spending it on. This knowledge will help you be more intentional in your spending and saving.

Additionally, if you have existing credit card or loan debts, you can budget with the goal of paying them off. There are additional upsides to paying down debts: Making these payments can also help improve your credit score and financial health for future credit inquiries, and give you increased spending power.

How to create a budget

The structure of your budget will depend on your personal goals as well as whether you are only budgeting for yourself or if you are taking your family or others into account. There are a few core things to keep in mind when beginning the budget planning process.

1. Evaluate and track expenditures

Creating a central place to track and record your spending is a key facet of a budget. Whether you make a spreadsheet, use a financial app such as Mint or PocketGuard, or select another method, having one tool that lays out all monthly and annual expenses can keep purchases easily organized. 

Along with having a tool, you’ll also need to know where you can find all of your expenses. Places you can find these figures include credit and checking account statements (you’ll need to keep your own record of cash purchases, since they won’t show up in these places). 

Expenses to track in your budget typically include:

  • Mortgage or rent payments
  • Personal loan payments
  • Utility bills
  • Vehicle bills and expenses
  • Food expenses
  • Insurance
  • Subscription services
  • Healthcare costs
  • Miscellaneous shopping expenses

You should have monthly (post-tax) income streams noted somewhere within this sheet, such as payroll, as you’ll easily be able to add up and subtract your expenditures from the total monthly income (either individual or family income, depending on your situation).

2. Minimize expenses

Once all expenses have been accounted for, you can identify areas where you can save money or decrease spending. 

To begin saving, it’s helpful to create a budget with strict, set amounts of money you’re willing to allocate for each expenditure area. Knowing some of the biggest spending areas for Americans is helpful; these include things such as food costs, transportation and miscellaneous expenses, like clothing or monthly subscriptions. 

3. Implement budgeting

Consistency is key when implementing a budget and staying within the specified budget range for each expenditure is important. It can be a prudent financial move to give yourself a monthly spending allowance overall and to choose a monthly savings goal.

Small victories along the way will help reinforce these new habits; after a month of consistently tracking expenses, you may find extra money in your checking account, which is always a good thing, and a good motivator.

Having some sort of budget plan can be highly beneficial not only for saving money, but also for enforcing better financial practices.

Benefits of budgeting

There are a variety of positive outcomes from sticking with a budget plan besides just saving money.

  • Organization: Creating a budget will help you pinpoint exactly where your money is going, which will help you organize your spending and recordkeeping overall.
  • Accountability: A budget will hold you accountable for staying on target with your financial goals.
  • Financial control: Staying on top of finances with a budget gives you the power to know where you are spending your money and enables you to make smarter decisions and advantageous adjustments to better reach your financial goals.
  • Plans for the future: Budgeting sets you up for success by enabling you to hit and surpass financial goals, both short- and long-term.

Having a budget can improve your current financial habits, in turn benefiting your financial health and security in the future.

Fine-tune your budget as you go

Budgeting can be a fairly easy way to start saving money almost immediately. Once you complete the budget-planning process the first time, you can fine-tune elements such as your allocations as you go, which will help you better align your expenditures to grow your savings and reach financial goals.

Some people may have complex financial situations in which expert input is beneficial. In cases such as multiple income streams with different tax implications, or expenditures outside of standard categories, a financial expert can offer professional guidance on managing money and growing savings more effectively. 

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