Home > Money Management > Budget Basics #1 – Why Budget?

Budget Basics #1 – Why Budget?

Do I need a budget?  Quick answer… yes.  The next plausible question is probably, Why?

Invetopedia.com defines a budget as “an estimation of the revenue and expenses over a specified future period of time.”   Beyond measuring income and expenses, a budget is a tool that will help you establish priorities and achieve your personal and financial goals. 

You may make a lot of money or have no problem paying your bills, which may cause you to question the value of preparing and maintaining a budget.  Granted, budgets are very helpful and sometimes necessary for people who are struggling to control their spending and manage their finances, but a budget can be beneficial for anyone, even rich people.

In some context we all live with budgets.  If you work for any governmental agency or large corporation, I guarantee that you’re working under some type of budget.  Furthermore, the taxes you pay and the quality of education your children receive are determined by a budget. 

The primary purpose of a budget is to manage finances in a manner that reflects your goals and priorities.  This is why most successful businesses utilize a budget.  It provides for an allocation of resources to the people and tasks that are important to your present and future success.  Think about a technology company.  If it’s going to enjoy long-term success, it must dedicate adequate resources to research and development; otherwise it won’t be developing new products and will soon be left behind by the competition.

I understand that not every organization or person uses a budget in a constructive manner.  Far too many people have created budgets with unrealistic revenue or profitability goals, and then badger people for not meeting the arbitrary standard.  It’s classic negative motivation, and usually the most successful thing it creates is a negative attitude.  I’m sorry if you’ve worked under these conditions.  I have, and I can attest that it’s easy to despise discussions about the budget.

Don’t allow someone’s misuse of budgets to cause you to overlook the potential benefits.   When used properly, a budget will help provide a roadmap to get you where you want to go with your finances, business and life.

Let’s say you want to buy a new car, take an exotic family vacation, save for your kids’ college, or put money away for retirement.  A simple solution is to just make more money.  Well… how are you going to do that?  I doubt that each week you go to your boss or customers and say… “I’ll only take half of what you owe me.  Don’t worry.  You keep the rest.”  You might be able to make more money, but is it going to take more time away from your family? What is that worth?

As a business owner, you may want to expand your business or make an extra $___.  How you going to do that?  How many more customers, clients or jobs will it require?  What kind of investment in people, equipment and overhead will be necessary?

Whether it’s your personal or business finances, a budget will help you develop the plan to successfully achieve your goals.  Life is about trade-offs.  There is not enough time or money to do everything.  A properly prepared budget will force you to think about those choices, invest the resources into your most important priorities, and monitor your progress.

Hopefully, I’ve made some good arguments of why you should have a budget.  In Budget Basics #2, I’ll talk about how to get started.

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  1. July 7, 2010 at 3:58 PM

    Great breakdown of why people should make a budget. For future budgeters, I recommend using Mint.com or other free budgeting sites! I think that the hardest part of making a budget is looking at everything you have and realistically breaking down what you can actually spend, instead of shooting into the dark.

    • July 7, 2010 at 10:09 PM

      Thanks for the comment. I’ll keep the mint.com in mind when I start writing about free resources for making a budget.

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