What Is a Budget and Why Is Budgeting Important?

Budgeting refers to the process of determining how you are going to spend your money. Using software like Quicken can help you track your spending so you can make sure you're on target for your financial goals. And, if you fall behind, you can make changes to your budget and readjust your spending habits.

Budgeting Is a Guide

Your budget for any particular time period is a guide for how you want to spend your money so that you can achieve your financial goals -- both in the short-term and the long-term. When you set up a budget, you can see where your money could go, and then you get to decide in advance which options are most important for you. For example, if you don't have a budget, that snazzy new outfit or top-of-the-line grill might catch your attention in the store and get you to buy it even though you should be putting your money elsewhere. However, if you have a budget, and you know you want to prioritize saving for a new car or a house down payment, you can turn down impulse purchases because you know the money is already earmarked for something more important.

Gathering Necessary Information

To make a budget, you need to know your income and your expenses. Income includes not only your paycheck, but also any other money you receive, such as rent from a rental property or interest on a bank account. Your expenses include anything you spend money on, such as housing, food, clothing, insurance, entertainment and travel. To make an accurate budget, it helps to have several months worth of your past spending documented so you can make realistic predictions about how much you spend in each category. If you haven't tracked your spending in the past, just use your best estimate and adjust it as needed as you get more information.

Budgets Are for Everyone

Budgeting is something that everyone, regardless of income or net worth, can benefit from. No matter how much money you make, you can always go bankrupt if you spend more than you bring in. However, budgets are also very personal, in that you decide which goals are most important to you. For example, one person might put a high value on driving an expensive car and be willing to work an extra job or cut back on other expenses to have one, while another person might be content to drive a used car into the ground to save up for a special vacation.

Budgeting Is a Process

As much as some people might prefer to set their budget and forget about it, good financial planning requires you to reevaluate your spending over time and adjust your budget accordingly. For example, if you change jobs so that your commute is shorter each day, you may be able to reduce the amount you have budgeted for gas costs and increase your retirement savings. Or, if the cost of food goes up, you may have to cut back on the amount of times you eat out each month.

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