Introduction to budgets: Why you need a personal budget

This post provides an introduction to budgets and why you need a personal budget. This is the first of a 5 part series on budgeting.

A personal budget is a written plan of income and expenditure expected over a given time. To determine if a surplus (income is greater than expenditure), a deficit (income is less than expenditure), or a balanced budget (income equals expenditure) will be achieved.

A lot of the times we keep a mental note of our spending and finances. This is usually done during or after the event/spend. A written personal budget is crucial to achieving short and long term goals. If you don’t have a budget, it is time to start being deliberate about your finances by creating one.

Why you need a personal budget

To help you achieve your financial goals

A budget is simply a written plan of where your money goes. Writing something often makes it tangible and somewhat official. Preparing a personal budget is going beyond an intention to manage your finances better to deliberate action and commitment.

For example, if you have a goal to pay off all your debt, it is necessary to manage your income and expenditure with a budget to ensure there is money left.

Have you thought about where you want to see yourself in 5, 10, 20 years financially? There are behaviors you need to establish and maintain in other to achieve your goals. One of the habits of highly successful money managers is budgeting.

Understand your expenditure better

A budget requires you to keep track of your expenditure. One of the keys to building wealth is spending less than you earn. In other to spend less than is earned, it is important to understand good money management concepts. For example, the difference between fixed and variable costs and needs and wants. Understanding these concepts will help in identifying expenditure that can be controlled easily.

I have to say that sometimes we all need to treat ourselves and indulge from time to time. However, creating a budget will enable you to have an honest conversation with yourself about when you can indulge in line with your goals and bank balances. It might be necessary to make sacrifices in the short term to enable you to indulge more in the long term. To prepare and learn more about good money mindset, The Richest Man in Babylon is a great book that helps in understanding basic money management concepts.

Reduce surprises

Ever been hit by an unexpected large expenditure? Was it unexpected? A budget helps to avoid surprises. Part of tracking your expenditure includes understanding how and when they occur. For example, if you have a car, there are maintenance costs that need to be planned for. Servicing, tax, MOT checks, insurance, and purchasing new parts (tyres, breaks, and so on). Building all known costs into a budget reduces the element of surprise and ensures that all expected expenditure is planned for.

An important foundation for creating wealth

A personal budget is one of the ways to ensure you have enough set aside in your emergency fund and one of the ways to achieve financial stability. If you view building financial value and wealth like a house, then financial stability is the foundation. A good and stable foundation provides a base to build and increase financial value.

There are lots of examples of people who became successful from nothing but this is usually the exception, not the rule and there is usually more to the story.

I recently read the story of Walt Disney, his first attempt to start a business was shortlived. He had to leave the business to get a job to make ends meet. This was temporary of course as we all know how the story ends. Managing our finances better using a personal budget is something anyone with the goal to increase their financial value has to master.

Coming next

The next post will be on the features of a good personal budget, subscribe and stay tuned.

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