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What Is The Purpose Of Budgeting?

Updated on November 6, 2011

Budgeting Creates The American Dream

Woody Allen was once famously quoted as saying "Money is better than poverty, if only for financial reasons". We all know this to be the truth. Money is something that invades our minds almost every waking second of the day. Many of us are worried about how we are going to get enough money to pay the bills each month. Some are concerned about protecting the money they already have. Finally, a lucky few are just able to relax and not have to consider money. They have made enough to live the good life. Since we all want to reach this final stage, it is important to understand the purpose of budgeting.

Photo Courtesy Ryan Canady

Why Budget?

Living A Life Of More Freedom

Living Debt Free

There is no doubt that America and indeed the whole world has become addicted to debt. In the United States, the average person has more debt than they have assets. This means that Americans are literally not producing as much as they are borrowing. This becomes a huge problem in the long run because it means that those people have to work their whole life just to keep up with the bill collectors. There is no enjoyment or light at the end of the tunnel for these people. The purpose of budgeting is to try to reverse this course. The purpose of budgeting is also to make sure that there is more money at the end of each month than expenses. That extra money can then be applied to debt in order to decrease its levels. Once someone has completely freed themselves of debt, then they may begin to accumulate wealth. In other words, they may begin to live the life they want to live.

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Creating A Safety Net

One of the largest purposes of the budgeting process is to create some financial security. Life has emergencies both big and small that come up from time to time. Those who are already burdened with debt are going to have a terrible time trying to cope with these emergencies. However, those who have looked into the reasons to budget should have no trouble understanding that they are completely capable of handling these emergencies. They will be able to use the safety net that budgeting has provided to them in order to pay for these emergencies.

Establishing Peace Of Mind

As mentioned above, financial emergencies can be a huge burden to those who are ill prepared. However, the purpose of budgeting is not just to avoid an emergency. It is also to establish peace of mind. Studies show that money causes more stress than any other subject. Through budgeting, many individuals are able to rid themselves of some of that worry simply because they know that they are fine. There financial house is in order, and they have a bright future going forward.

Envelope Method Explained

Ways To Budget

There Is No One Right Way

Nothing Set In Stone Method

The purpose of budgeting is to keep track of expenses and income. However, there are some people who are just not that interested in this approach. These are individuals who say "what is the reason to budget when I can take care of myself". In other words, they want to just place limits on themselves mentally without having to write anything down. As long as they are placing limits on themselves, then they are technically setting up a budget.

Looking Back In Time Method

Some individuals prefer to look back at how they have budgeted their money in the past. They feel that this will give them the most accurate picture of how they are going to spend and save in the future. In other words, they see that perhaps they spend more than they would like on fast food. This can be taken note of and hopefully corrected in the future, but it is important to just realize that this is happening in the future. When someone using this method first sits down to start budgeting, they might give themselves a little more room on fast food than on other categories.

Allowance Method

This budgeting method has the purpose of trying to treat oneself like an adult. The idea here is that a certain amount of money is allocated to be spent every month after all bills have been paid. That money may be spent any way that the individual sees fit, but the total amount that is spent is limited to a certain amount. Under this method, there is no thought put forth beforehand about how much will be spent in each category.

Envelope Method

Similar to the allowance method aside from the fact that money is allocated to certain categories ahead of time. Noted financial guru and motivational speaker Dave Ramsey explains in the video above.

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Are You Prepared?

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Which Budgeting Method Do You Use?

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    • hessa johnson profile image

      hessa johnson 5 years ago

      I'll have to try the envelope method. Dave Ramsey gives great financial advice. Super lens.