The Benefits of a Budget

A budget can help you create smart habits where you are aware of the impact of the financial decisions you are making, eliminate guess work and make you more confident about your finance. Budgets don’t have to be complicated; they have to be simple for them to work. We have created an easy to use budgeting template for you to get started with creating your first budget that works.

Benefits of a personal budget

These are some benefits of making a budget:

Pay your bills on time: Planning in advance for the bill that going to be due in the upcoming month will help you pay your bills in time and help avoid any late fees. It’s a great way to organize at the beginning of the month and be stress free throughout the month.

Reduce surprises: A budget will force you to think about all the expenses that are likely to come up in the month. This exercise alone will help eliminate most of the surprises as you will be thinking in various directions like is there any fees due, is a bill payment coming up, is any tax due this month, do I pay for some services this month, etc.

More control: Making a budget will give you more control of your finance. You will know where any why you are spending money and the result you expect from it. A simple budget can put you in the driving seat when it comes to spending your money wisely.

Align priority: Often financial decisions are a balancing act. You are always trying to balance the amount of money that should go for savings, short term spending and big ticket purchases. A budget will help you make those choices simpler as you are thinking about all those expenses at one time and not in isolation.

Help build savings: Following a budget, you can direct a portion of your income to your savings and investment accounts every month and build your savings over time. A budget can help you achieve long term goals and work towards big purchases.

Move towards a target: Keeping provision for long term goals in your budget – like buying a house, buying a car, etc. will help you save for down payment and move towards those goals.

Benefits for a small business to create a budget

Not only individuals business also benefit from creating a budget. However many times, small business and freelancers ignore making a budget. Some benefits you get by making a budget are:

Optimize your spending: Creating a budget will help you optimize the use of one of your most limited resources – Money and also time. You will be able to prioritize your spending, something which can make a big difference to your business.

Regulate flow of funds: A good budget will help you identify the inflow and outflow of cash. This will help you regulate the flow of cash in your business and will ensure you don’t run out of liquidity. This is especially useful for small manufacturing oriented business.

Financial goal setting: A budget should be part of the financial goal for your small business. Setting a monthly budget will give you a guideline to follow for the rest of the month and aid you in setting other goals and targets for your business. It will help you save time and avoid mistakes by making informed decisions.

Identify wasteful spending: You can see patterns of spending which are not evident otherwise. Do you have too many magazines subscriptions? Are you paying for products you are not using? Do you have business memberships that are not helping you grow your business?

Make difficult decisions upfront: Making a budget will help you make difficult choices upfront at the time of planning for the whole month. This will give you a good picture of what to expect going into the month.

I am purposefully not writing on benefits a large corporation can have by making a budget, all large corporation make budget by many individuals and small business leave it to estimations.

Some Common Drawbacks of a Budget

Making a budget also has some drawbacks, but in our view the benefits outweigh the drawback significantly.

Making a budget takes time: By making a budget, you are investing time not wasting time. Once you get in to the habit of making a budget, you can reuse most of the work you have dome in the previous months and make your next month’s budget quickly. You will also find a simple template on the resources page to help you get started quickly.

Budget target will likely be missed: If you make a very strict budget, you are likely to miss your budget targets. However the thing to understand is that budget is a soft target, you are trying to move as close as possible to the target, rather than hit the target.

Cannot plan for unknown expenses: It’s true that you can have unknown expenses in any given month but over time, these will average out and you will be in a better position to know. By putting aside money for planned and unplanned expenses every month you will develop skills to better estimate surprises.

Update: The article has been updated to add more detailed benefits and some drawbacks of making a budget since it was originally published.

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