Learn about the importance of budgeting and crucial points to consider while preparing a budget.
What does Budgeting mean?
When an individual takes into consideration their income and expenses to devise a strategy to allocate funds for short-term and long-term expenses, the process is known as 'Budgeting'.
Budgeting will help us determine in advance whether there will be enough money to spend on the things we need or would need in the future.
The process will help us prioritize our needs and keep track of our expenses.
Why is Budgeting Important?
Since Budgeting allows us to create a plan for spending our money, it ensures that we never run out of money and we can meet our expenses in a controlled way.
Budgeting will help us achieve our goals without any financial hiccups.
A budget will help us :
● Set short-term and long-term goals for personal growth, financial growth, business growth, etc.
● Track revenues, expenses, and cash flow
● Cut down costs to avoid overspending
● Prepare for business seasons and slowdowns
● Maintain records of finances
● Ensure resource availability
● Formulate an effective retirement plan
● Prepare for emergencies
Budgeting creates financial stability, it helps us build financial independence and achieve our goals by spending within our means.
Only knowing the benefits of budgeting will not frame a budget for us, we must consider various factors that will affect the result to draft the budget plan that will best suit us and finalize it once it meets all of our concerns.
But there are some mistakes that we must avoid while budgeting.
The biggest budgeting mistakes can derail our progress and add to our financial anxiety. Some of the common mistakes that we make while budgeting are:
● Setting unrealistic budget strategies: Setting a lofty budget plan and hoping for a dramatic life change and sudden influx of cash is unhealthy and can become a real challenge. Before creating a realistic budget plan we must know our cost-of-living expenses, guessing the costs or estimating them roughly will not work out. Our monthly expenses may likely be more or less than the estimated expenses, therefore gathering all the information and keeping track is important.
How can we avoid this?
We do not have to rush things to make a sustainable budget. We must keep track of our regular expenses by maintaining a separate record of fixed costs and variable costs for over a month. Further to it, we must tally them at the end of every month to come up with an accurate expense figure. We can set aside a small percentage of our spending for our daily savings, we don’t have to start strictly, we can do it step by step which will help develop the habit.
● Forgetting to save for the unexpected: If we miss out on some expenses then we may stumble upon a pitfall. The idea is to consider all expenses to avoid getting tricked into shelling out funds in excess.
How to avoid this?
Apart from our daily expenses, we must also make sure that we set up separate funds for expenses, especially like these. Some irregular expenses may pop up anytime, and keeping track of these expenses will also contribute to making a proper budget plan for ourselves. Budgeting is not a few days’ work; it has to be planned based on the record of a few months.
● Not tracking our every spending: We often track the spending that is visible to us but it may happen that sometimes there are some hidden expenses that we may miss out on as they do not show up easily on our bank transactions. These types of expenses may lead to confusion and may create a problem while estimating accurate spending for the month. An effective budget plan must include the smallest of the smallest expenses, hence tracking every spending becomes crucial.
How to avoid this?
Apart from checking all the history of our banking transactions, we must also ensure that we check other areas where we are most likely to spend little or generous amounts of money. Keep track of them separately as these expenses are often hidden and we forget to account for them.
● Not differentiating between priorities and needs: We often tend to fail in differentiating between our priorities and our needs. Needs are necessities but at the same time we must be able to prioritize them accordingly, for example, we may need to buy new clothes but also our rent is due, although clothes are necessary they can wait, our priority should be the rent.
How to avoid this?
We must learn to draw a scale of preference for our budget. To frame our budget plan we must always consider two major factors: Urgency and Importance. Some needs must be important but not urgent, some may be urgent but not important, and some can be both urgent and important. We must get our priorities right, or we might end up spending on the things that may not be required for the moment at the expense of the things that need the spending and are more important.
● Not keeping free space: We often, in the excitement of saving and planning, forget to keep some funds aside for our other(apart from the expenses of houses, family, self, offices, retirement, etc.) expenses, like travelling, vacation, breaks, fun, etc.
How to avoid this?
We can keep some funds for use when taking some time off. Although budgeting is important, it must also include some wiggle room for us to sit back and relax.
The Bottom Line
Budgeting is a crucial part of our lives, making a budget plan will help us be financially sound and we will never run out of money.
Making smart and conscious choices is the way to lead a peaceful and healthy life.
Hence, by avoiding some of the mistakes listed above we can make a proper budget plan for ourselves that will best suit our needs and desires and meet all the expectations we may have.
We mustn't spend exorbitant amounts on things that we don't need, budgeting is one of the simplest financial skills to discipline ourselves to keep our finances in check.
Apart from our daily savings, we must not be overly restrictive and not stress out over planning the budgeting, keeping in mind all the factors we can make enough space for all of our expenses along with savings and other investments.
Along with setting aside daily savings and other funds we can also plan on investing in other fields that will help us stay on the profitable side of the crowd. One of the platforms that can help us make daily savings a habit is Jar.
Jar aims to bring back the concept of a piggy bank. While budgeting requires keeping track of all our expenses, jar app helps to save a little amount on every expense. It also helps in keeping track of investments and managing personal finances through easy investments.
Download the app now for better budgeting and greater savings!