You will often hear financial experts desperately telling anyone who will listen that one of the most effective ways to manage and control your finances is to set yourself a financial budget. In my last post I explained step by step how to make a budget. But why should we bother?
In this post I will set out some of the key reasons why setting a budget can (and hopefully will) help you shore up your personal finances and help you achieve your financial goals.
Lack of Wealth Is Caused By Ignorance
The above statement is not meant as derogatory to anyone who is not wealthy. The point I am making is that I believe one of the main reason most people either get into financial trouble (I am referring to debt problems here) or fail to be as rich as they could be is because they are simply unaware of the concepts of financial planning, investing and financial discipline.
I have heard many people say the reason they got into debt was because they simply lost track of their spending or they didn’t realize how much debt they had until it was too late or that ‘things simply spiralled out of control’. I firmly believe that most of these people could have avoided the stress and strains that excessive debt caused them by being more aware of their finance and planning their spending better. The most effective way to do this is by setting yourself a financial budget or spending plan.
Successful Businesses Do It
The aim of businesses (be they a small one man operation such as a plumber or a multinational corporation like Coca Cola) is to generate profit for their shareholders. Virtually all successful businesses do two things regularly, without which they would more than likely not be as profitable;
- Produce Annual reports – to explain and analyze their profits and expenses
- Set internal budgets – to control costs and help generate profit
Think about this for a minute. If it is common convention amongst business managers that these two measures are essential if the business is to stand a chance of generating profits and being successful, why do the vast majority of individuals not take a similar approach to their own personal finances?
Budgets Allow Financial Reliability and Predictability
Have you ever run out of money at the end of the month? Not sure if you can afford that holiday next year? I could go on but the point I am trying to make is that by doing a budget as part of your financial planning you can introduce some predictability to your finances. This means you can effectively plan for the future. This may be planning to move to a larger house in a couple of years time, it might mean planning a big night out next month or even an early retirement.
Makes you richer by putting your money to better use
Budgets can make you richer in two ways. Firstly one of the main benefits of setting a financial budget for yourself is that it helps your stop wasting your money. Budgets are great at trimming the fat from spending whether they are multi million pound corporation budgets or on a personal level they simply stop money being wasted.
If you budget well you’ll have an amount of money left at the end of each month which you would not otherwise of had. This makes you richer than you were before in the sense that your disposable income has increased, freeing money for you to spend on things you wouldn’t have been available to afford.
Makes you richer by allowing you to invest savings
OK so if you budget you can increase your disposable income as we have just discussed above. If you are even smarter you don’t spend [all] of that extra disposable income, but instead invest it.
By investing the extra/saved money you now have you can hopefully generate new income (assuming you invest it wisely – more on this later) and wealth that you previously didn’t have. This means that if you follow this approach your net wealth will increase over time, or in other words you will get richer.