Why is Budgeting Important for Financial Planning?

Posted by David Funes on Sep 29, 2022

debt-finance-calculation-optimized-is644365816Creating an effective financial plan for your future requires that you make a comprehensive budget that takes all of your monthly income and expenses into account. If you want to gain financial security, having a budget can help you achieve your goals in a more structured manner. This article takes a closer look at why budgeting may be important for your financial plan.  

You'll Be Able to Set Clear Goals 

Having a budget gives you a better idea of what your current financial status is, which may make it easier for you to work towards your goals. Without having a budget in mind, you would essentially be spending your money in an aimless manner that doesn't take future income into account.  

A budget also pushes you to map out future financial goals. Once these goals have been set, you should be able to determine how much money you should save on a monthly and annual basis. You can then track your progress to determine how effective your financial plan is.  

While having a set budget means that you might need to forgo some purchases that you would otherwise make, avoiding these unnecessary expenses increases the likelihood that you're able to reach your financial goals in a reasonable timeline. Keep in mind that the goals you set in your financial plan can be anything from saving for a house to saving for retirement.  

Budgeting Will Help You Avoid Spending Too Much 

Budgeting should also help you spend less in the long run. If you have one or more credit cards, you likely know how easy it is to charge something to your credit card and pay for it at a later date. However, too much credit card debt makes it more difficult for you to reach your financial goals. If you make a budget and adhere to it, you should never be in a position where you don't have enough money to pay rent for the month or make your car payment on time.  

You Should Have Enough Funds for Emergencies 

Life is rarely predictable. If you get into a car accident or lose your job, your financial situation could undergo a considerable amount of strain. When these emergencies arise, it's better if you have some savings in your bank account that you can tap into. Once you set a budget, you should be able to start spending less and saving more money. Some of your savings could be placed into an emergency fund.  

When creating a comprehensive budget, try to implement an emergency fund into the budget that's comprised of 3-6 months of living expenses. With this money in hand, it's less likely that you will go into substantial debt. Keep in mind, however, that building up 3-6 months of savings can take time. If you implement this fund into your budget, you can set realistic goals that allow you to put a small amount of money into your emergency budget every month.  

Your Eventual Retirement May Be More Fulfilling 

If you believe that now is a good time for you to start increasing your savings for retirement, a budget should assist you in your goals. Try to set aside some of your monthly earnings for a 401(k) or IRA account. Over time, your retirement assets will only grow.  

Developing a financial plan requires clear goals and a preset timeline that will guide your future financial decisions. If you want your financial plan to have structure, setting a budget allows you to build an emergency fund, avoid spending too much, and save for retirement. 

This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. 

Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation. 

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