The Benefits and the Purpose of a Budget

What does the word “budget” mean?

A budget is a plan made for the proper allocation of money. We spend money for different purposes. Making a budget means ranking these purposes in terms of their priorities and deciding how much money should go to meet which purpose. In short, a budget is for spending money strategically.

Here’s a detailed discussion to help you understand the importance of budget.

Never short on cash

The very first benefit of creating a budget is that you never run out of money. That’s right; strategic spending ensures that your wallet is never empty and there’s always money in it. It’s actually quite easy to understand why. Budgeting allows you to list all your spending. No spending, therefore, is uncalled for and unanticipated. As you know your spendings beforehand, you remain prepared for them and therefore always have money to spend.

Budgeting for enterprises

Not just individuals, businesses of all sizes and scales create monthly budgets. In fact, they take budgeting so seriously that they hire people to handle the responsibilities related to it. Creating and maintaining a budget gives an enterprise actual insights into the cash flow.

Budgeting for enterprises is entirely different from how ordinary people that are wage earners view budgeting and create budgets. To provide a comparative analysis, normal people have priorities like groceries, electric bills, insurance premiums, mortgage premiums, etc whereas for an enterprise the key priorities include meeting the sales target, managing the inventory, make new investment plans, etc. As the priorities are clearly different, so are the budgets.

Budgeting techniques

As we are breaking down budgeting to ordinary people, this article will discuss the purpose of budgeting from the point of view of a monthly wage earner. They need to understand that there are multiple budgeting techniques out there; they can choose the one that suits them and stick to it.

Incremental budgeting is one such technique. It’s a simple budgeting method. In this method, last years’ earning and spending figures are taken and either a percentage is added to them or deducted from them in order to reach the current years’ budget. This method might be simple but its drawback is that it is a comprehensive method and not applicable to monthly budgets.

The 50/30/20 rule is a more pragmatic technique. We have already discussed it at length. Many people have followed this technique and benefited from it. The snowball budgeting system is for those who have unpaid debt. This budgeting technique requires you to do some calculation. First, you need to calculate the total amount you owe. Then decide how much of your monthly income you’d spend to reduce the debt. Handle the smallest debt first, then go for the large ones.

You can customize these techniques and use a combo of them. Do everything that is sensible and help you finances stay afloat.

Budgeting benefit: Debt reduction

As the discussion above points out, the reduction of debt is a key benefit of budgeting. But you see people complaining that even after doing everything advised by experts, they are still unable to pay off their debt. Why does that happen? If budgeting helps reduce debt, why do people who create monthly budgets based on advice from financial experts find themselves unable to repay their debt?

Let me tell you the reason. It’s because they lack patience. Proper budgeting techniques like the ones described above can gradually reduce debt, but that’d take some time. One should be patient and stick to following the technique. He shouldn’t drop it after following it for only a couple of months because there’s no visible result.

Budgeting benefit: Finance knowledge

An obvious benefit of budgeting that is often ignored is gaining knowledge in finance. When you make a budget and maintain it month after month, you become efficient in handling your finances. Budgeting helps you learn some valuable lessons in life. The 50/30/20 rule, for example, requires the budget planner to spend 50% of their monthly income to meet the essential needs. Strictly following this rule means not caving in to impulses. The snowball budgeting method can help someone recover from debt. After that, the budget planner becomes apathetic to spending lavishly and starts taking good care of their money.

Budgeting benefit: More saving

Some budgeting methods are exclusively for saving. Some of these methods are used only to funnel money into the emergency savings fund. In general, budgeting, when done correctly, gives you a leg up in savings. We waste a lot of money every month without realizing. Budgeting functions like a stopcock and regulate the outflow of money. The result is increased saving. Whatever budgeting method you follow, follow it seriously and you’d be amazed to see just how much money you can save at the end of a calendar month.

Summing up

So there you are. The benefits one reaps by following budgeting techniques make life easier for them. And that is the real purpose of saving: a worry free and smooth financial life.

Do You Know How Americans Spend Their Money At Every Age?

Americans are famous for their style of living and spending habits. A research shows that about 70% of the US economy is accounted by consumer spending. Have you ever wondered what a typical American budget would consist of? Actually, it depends like “the more you have, the more you can spend”, which is the strategy of most Americans.

 

Most Americans buy to spend their money on various stuff that can be broadly divided into two main categories:

  • Firstly, they spend on essentials such as housing, food, and clothing.
  • Secondly, they spend on non-essential goods and services.

Every year the U.S. Bureau of Labor Statistics takes a consumer expenditure survey to analyze the spending habits of Americans. Let us look into the details of the Consumer Expenditure survey and understand the spending habits of Americans at a different age.

Average monthly budget at different age:

A recent survey shows that housing accounts for the maximum expense for Americans ranging from 30-35% of the monthly budget.

The first jump:

When they turn 25 and get into the proper career mode, they get the first spike in spending with their first jump of earning.  But do you really feel there’s any inter-relationship between age and spending habits?

Let us understand the relationship between age and monthly budget:

# Under 25

Fewer than 25 is the age where there are no responsibilities and you can afford to spend on things that you love. Young adults at this age are relatively thrifty; know how to control their expenses and thus spend less than what their elders spend in most of the things. In this phase, most of the money is spent on education.

Average monthly expense report:

Housing:$944
Transportation:$527
Food:$408
Healthcare:$82
Education:$214
Entertainment:$113
Total (Average monthly family budget):           $2733

 25 to 34

The 25 to 34 age group is referred to as millennials where people get into their career phase. They have a proper job that fetches a good monthly income and which they can use in a more efficient way. People in this age group spend money in a sensible way, either to clear off debts or start saving money.

Average monthly expense report:

Housing:$1525
Transportation:$815
Food:$553
Healthcare:$231
Education:$94
Entertainment:$216
Total (Average monthly family budget):          $4339

35 to 44

This phase is termed as adulthood where people get into the family way of life. They would want to settle with kids and spend their money on kids. But with the increase in the number of persons in the family, there is a shoot up in expenses expected as well. The housing budget shoots up with finding a bigger place to live. In general, this is the phase when people get stuck with the highest food and housing costs with marriage and/or mortgage expenses.

This age group is termed as generation-X when your kids enter the teenage phase and the expenses are at a peak that accounts to the driving costs, transportation, education etc. As kids head to college, education costs also contribute to a major part of monthly expenses. Most people start looking for a passive income at this stage to cover up the expenses.

Average monthly expense report:

Housing:$1763
Transportation:$982
Food:$701
Healthcare:$389
Education:$222
Entertainment:$276
Total (Average monthly family budget):  $5813

 

  • 55 to 65

This age group is called boomer age where the income drops off and the expenses of food and transportation also set low. As with age, there’s a rise in healthcare costs.

Average monthly expense report:

Housing:              $1516

Transportation:  $835

Food:                    $583

Healthcare:        $426

Education:           $97

Entertainment:   $277

Total (Average monthly family budget):                    $4898

 

  • 65 & above

This age group is called the silent generation or the golden age. In general, older Americans tend to cut down all the expenses in almost all categories with an exception in healthcare. With age, the dependency on medical care and prescribed drugs increases and thus the health care costs contribute to the major expenses.

Average monthly expense report:

Housing:              $1294

Transportation:  $571

Food:                    $459

Healthcare:        $480

Education:           $22

Entertainment:   $205

Total (Average monthly family budget):                    $3722

 

Summing up:

No matter what age group you are into, you can still begin to have a hold on your finances with little planning. It’s important to analyze your spending habits and cut down in the areas where you’re over-spending. Create a budget and stick to the plan. This way you will soon master the skills of finance management.