What's a Budget and Why Do I Need One?

Woman reviewing finances on phone.

Do you know the true purpose of a budget? Most people think of a budget as nothing more than a restriction on their spending.

The irony here is that it’s just the opposite! It may sound surprising, but a good budget makes easier for you to get the things you need and want by creating transparency and structure for your spending. It's not about restriction, it's about making sure that your spending matches your priorities. 

If you're reluctant to create your own budget, think about the real reasons you’re avoiding it. Is it because:

  1. You’re afraid to see the real numbers?
  2. It seems too time-consuming?
  3. It seems too difficult?
  4. All of the above?

If you answered “4”, I'm right there with you.

When I first joined the “real world” after college, the thought of creating a budget seemed like such a boring, daunting task. I didn’t feel that I spent my money frivolously, so why add a layer of unnecessary constraints to my life?

In my mind, a budget was something that would be nice to have, but it wasn’t a necessity.

The Importance of Budgeting

You know all of those little “emergencies” that personal finance experts are always warning you about? Yeah, those happened — all at the same time. Then, to add insult to injury, I ended up with a few hundred dollars in overdraft fees. And that was surprisingly difficult to bounce back from!

And to think, it’s all because I didn't have a plan. A simple, little plan could have saved me hundreds, if not thousands, of dollars in the long run.

So after months of throwing money away, one $25 fee at a time, I decided to bite the bullet. I sat down at my computer and began the simple task of adding up how much debt I owed.

4 Steps to Creating a Personal Budget

I didn’t use a fancy program or anything that I felt would complicate things or overwhelm me. In fact, the first time, I literally used a pen and a notebook. And here’s what I did:

Record sources of income and balances

I logged into each account, one at a time, and wrote down my balances, noting both the total balance owed and the minimum payment due each month. This way, I would know the total amount of debt I owed, in addition to the total minimum I needed to put toward my debt each month in order to avoid falling behind on any of my accounts.

Identify fixed expenses

Once I was finished with that, I wrote down all of my fixed expenses for each month. I’m talking utilities, internet, cell phone, rent (or mortgage), etc.

Find the monthly total owed

Then, I added the monthly totals for my fixed expenses and my debt payments. The result was the amount of money I absolutely HAD to pay each month in order to remain current on my bills and debt payments.

Calculate the remaining balance

I took that amount and subtracted it from my monthly income (after taxes, of course), and that told me the amount I had left to put toward everything else.

The Secret About Budgets

I honestly thought that knowing the amount of money I had to spend at the end of the month would feel restrictive. But the thing is, that amount is the same whether you choose to acknowledge it or not. In the past, I had chosen not to acknowledge it. And that made every month a gamble.

Not only was I gambling with the present (Will a quarter of a tank of gas last me until payday?), but I was also gambling with the future. Because, by not having a spending plan, all those overdrafts I mentioned earlier, were literally draining my future earnings.

And when you realize that a full day’s work barely covered the amount the bank was charging you just for being irresponsible, it gets old – fast!

But when you finally just sit down and do it, it’s impossible not to feel a sense of freedom. Because now that you are the one who controls where your money goes, you can finally start making smart financial decisions!

Need help getting started with your budget? Confidential, judgment-free budget counseling is available for free! Start online and learn how to make the most of your money.

Tagged in Budget tips

Jessica Horton is a former copywriter and community manager at MMI.

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