What is budgeting and why is it important

November 8, 2021

We live in a world where we need money to live and survive. We need to pay for necessities like food and shelter, and money for luxuries like holidays and hobbies. There is no way around this (unless you go off grid and live off the land somewhere remote)…

When we accept that we need money to live, we must also accept we need to learn how to handle that money effectively.

And this is where budgeting comes in!

So, when you hear the word budget, what springs to mind?

Usually, people straight away think that it means to be tight and restrictive. There are negative connotations attached to the word budgeting and the assumption you have to cut-back, can’t buy all the things you want, and you have to make big sacrifices.

But this could not be further from the truth.

There is a big difference between being budget and having a budget.

A budget is a useful tool or strategy to help you manage your money effectively. It helps you assess your financial situation; gain an understanding of what money you have coming vs. what money you have going out.

Types of budgeting

There are many ways to budget including the 50-30-20- method, zero-based budgets, the envelope method, and excel spreadsheet templates (template coming soon!)

At first it can be overwhelming learning about all the methods, but this is great because it means there will be something for everyone. Spend some time finding one that suits your lifestyle and spending habits – you will only learn this by trying different ones out.

One of the top rules of personal finance is to live within your means by spending less than you earn.

And you can only spend less than you earn if you have a clear understanding about what you earn and how you spend your money.

Two elements to budgeting

Budgeting includes two key parts:

  • Forecasting/Planning
  • Tracking your spending

When you forecast for the month, you compare the money coming in (your salary and other income sources) vs. the money going out (for fixed expenses e.g., rent, phone bill etc). Then you see if you have any money left over and decide how this will be allocated (into savings, or investments, and spent on other things that you want).

Once you have created your budget, throughout the month you must keep track of your spending. It is all well and good making a plan for your money, but if you don’t stick to it throughout the month, it is as useful as a chocolate teapot.

You can track your spending manually with a pen and paper, or a spreadsheet, or you can use different budgeting apps (most of which are free).

Learning to live with a budget helps you feel more in control of your money, helps you clear and stay out of debt, assists you in reaching financial goals, and can alleviate financial stress. A win-win situation.

Blog by Laura Moore. Check out more of her blogs at https://www.lauraannmoore.co.uk/

Remember, if you want to talk more about money and budgeting, give us a call on 0141 848 6353 or drop an email to support@amifinancialsolutions.com