Budgeting is the process of creating a plan of your current and future spending, which allows you to determine in advance, whether you will have enough money to do the things you need to do or would like to do in the future.
Why is budgeting important?
Gains control of your spending
Many underestimate their regular spending by overlooking how much they spend on everyday items. Creating a plan of your expenses will help you plan better while also identifying areas where you are overspending or could save money. It is also important to factor in one off expenses, such as a new car or maintenance to your home, so that these are accounted for in your spending plan.
Enables you to save for the unexpected
Financial turmoil can be caused by unexpected surprises. A loss of a job, becoming sick or injured or having a death in the family could result in financial pressure. This is why it is important to identify your essential spending with the view of establishing an emergency fund. An emergency fund is recommended to be at least three to six months of your essential expenditure held as cash in an account that is easy to access. This helps to avoid the use of debt options or accessing savings which are earmarked for other purposes.
Provides focus for your financial goals
By budgeting you can focus your money on the things that are most important to you. This could be a dream holiday, saving for university fees for children or improving your home. You can create a plan and monitor your progress to make sure you are on track to reach your goals. Budgeting can also be used for shorter term goals. If the mini-break you are dreaming of is unattainable right now, then a budget can help you understand the changes you can make to achieve that goal.
Preparing for retirement
It is likely that you will have a different pattern of income and spending in retirement. In order to prepare for these changes and to help you plan ahead, it is a good idea to consider your budget in retirement. Having a good idea of your spending needs, will help you identify the income you are likely to have to spend and your retirement planning needs. You can then take action to make changes to improve your future position.
Whether you are creating a basic budget to monitor your day to day spending or working towards achieving your financial goals, budgeting is an extremely useful tool for your financial planning. By having and sticking to a budget you can keep your spending on track and ensure that your savings for emergencies and financial goals stay consistent.
If you have any questions regarding this topic, please do contact your Financial Planner.
