What is the Purpose of Budgeting? How to Achieve Financial Freedom

Whenever I suggest to anyone struggling with their finances that they should have a budget, I often see their eyes glaze over, and they shift uncomfortably in their seat. Many people are put off by the word budget as it seems overwhelming and restricting. In this post, we discuss the purpose of budgeting and how it can help get your financial situation under control, so you can enjoy financial freedom instead of living pay cheque to pay cheque. 

What is a budget?

• A budget is planning how to spend and save your income.
• A budget helps us balance how much money comes into the home and how much goes out.
• A budget prioritizes important responsibilities such as a mortgage, rent, car payments, medical bills, and food over everything else.
• A budget is tailored to your life and specific needs. 
• You can follow a budget for as long or as needed. If you want to get out of debt, you can follow a budget permanently to keep yourself in the black and enjoy the rewards of having a healthy bank balance and savings account. 

Why is budgeting important?

If you fail to plan, you plan to fail, which also applies to your finances. Not having an emergency fund means you don’t have a plan for when things go wrong, which they always do! Not having an emergency fund may result in you having to borrow money to fix something, which gets you into a deeper financial mess.

• Ask yourself, what are my life goals, and how do my finances fit into them?
• Keep your budget simple, so it is easy to stick to.
• Set reasonable, achievable goals, so you don’t feel like you’re being punished.
• Make sure your budget is also achievable for your spouse. It can only work if the budget is attainable for both of you.
• Try to make room in your budget for some fun, no matter how small it is.

Benefits and purposes of budgeting. 

1.  One purpose of budgeting is that it stops you from overspending and helps you control your impulse spending.
2.  It helps you to stop spending more than you earn each month and prevents you from amassing debt.  
3.  A budget helps prevent most of your income from going towards debt and loan repayments. Instead of paying for food, rent, bills, and having fun, most of your salary is already committed to debt repayments. Having a budget allows you to break free from debt and stops you from living pay cheque to pay cheque.
4.  A budget lets you see where you’re spending your money and can lead to a better understanding of your spending habits. You can share this information with your spouse so they are on the same page. Sharing your goals with your partner will help to prevent impulse purchases, stop unnecessary spending habits and smash your financial goals.
5. A budget is a plan that helps you prioritize the things most important to you, such as goals and paying your bills, before you start spending money on luxuries. Your goals may include saving for your first home, starting your own business, or getting out of debt. A budget helps to guide your expenses and enables you to track your cash flow and progress.
6. Budgeting helps you save by automatically putting money into a savings account each month instead of buying a posh coffee on the way to work. Having an emergency fund to fall back on is paramount if you need to fix your car or buy a new washing machine without going into debt. People who do not have a budget tend to save less money than those who do. 
7. Another purpose of budgeting is that it enables you to stop worrying. Once you start paying off your credit card debts and putting that money into an emergency fund each month, you’ve got peace of mind that your emergency fund will cover your mortgage payments for a few months if you lose your job. You can finally no longer have to be dependent on luck or fate. You have no reason to worry.
8. Budgeting is flexible, so if certain areas of your budget don’t work or circumstances change, like if you have to pay a parking fine, you can move money from your entertainment category to pay the bill on time rather than waiting until payday, knocking up a late payment fee and spending double! It’s not great sacrificing your fun for that week, but that’s the consequence of parking in the wrong place!
9. You make the rules. After all the bills are paid, you decide how you spend the remaining money. You decide how much to spend on each category. So, if you want to put more money towards your leisure activities, if you meet your other obligations and have savings, you should not feel bad or guilty about your decision. Once you set realistic limits, you need to stick to them. 
10. Budgeting is not about limiting the fun in your life but about risk management, opening opportunities, and having enough money to have more fun. The key is that you must remember to include the fun categories in your budget.
11. It’s easy to keep track of your income by using an online app on your smartphone or your laptop, making the whole accounting and budgeting process much simpler. Here are 10 excel templates to help you start your journey to financial freedom!

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 Different types of budgeting 

• The envelope system is where you have an envelope like this one for each expenditure category and put the amount you are allowed to spend in each envelope. So, for instance, after your bills are paid, you might decide to put £40 a month away for entertainment. So if you wanted to go to the cinema, you would take the money out of the envelope marked entertainment and return any change to the envelope when you came home. If you decide to go for a meal in a few days, you need to check that there is enough in your entertainment envelope to cover the expense. If not, you will need to wait until next month. It’s the same with clothing, coffee, lunch, and all other categories. Set a budget or spending limit for each category and stick to it! Check out this easy-to-use envelope system. It’s so handy to slip into your bag.
• With an online budget, you can control your finances by using a version like this Martin Lewis budget planner, it’s so simple to use, and there is a guide to using the planner correctly.
• Budget planner. You can write your incomings and outgoings in a budget planner like this one and divide your outgoings into categories to create a simple financial planner.
• Excel spreadsheet. You can use any of the Excel budget spreadsheets listed in this post to create and manage a budget to suit your needs.

FAQ about the purpose of budgeting

As always, if you have any questions or concerns about the purpose of budgeting, let us know in the comments.