Budgeting is important, but it doesn’t always have to mean spending less. Rosie Hooper, chartered financial planner at Quilter, discusses the benefits of having a budget in place and why it is important not to short-change yourself on life.
Why is a budget important?
You can’t manage what you can’t measure, so having a budget in place is very important. However, being on a budget doesn’t have to mean stopping yourself from doing or having all of the things that you enjoy. If you do not have a budget in place, then you won’t know whether you are spending too much or too little.
While there are people who need a budget in place because they overspend and are trying to cut back, many people actually underestimate the amount of money they have to spend. While that is perhaps not such a bad thing as it means you are not spending beyond your means, it could also mean that you are being unnecessarily stringent and are depriving yourself of things you could reasonably afford if you wished to – such as social activities that provide opportunities to meet people and reduce loneliness.
What are the benefits of having a budget in place?
The primary benefit of budgeting is being in control. Clients often say that they feel they are spending too much and often need to pull in the purse strings, but once they have a budget in place they are able to gain a clearer picture of their finances and can learn to manage them more effectively.
Having a strong sense of control over your finances allows you to plan week to week, month to month, or even year to year, with the sense of security that you know the amount of money you have to spend in that time.
A tailor-made budget can be hugely beneficial as it can allow you to plan ahead and ensure that your money, regardless of how much or how little, will be working as hard as it can for you. Being able to refer back to your budget can help curb unnecessary spending, or even give you the freedom to buy that wish list item or go on a day trip with friends as you know you have the funds to do so.
How can you ensure you are not short-changing yourself on life?
Many people feel lonely at some point in their lives, and money can sometimes exacerbate this if you limit what you do because you are worried you have insufficient funds. With a budget in place, you can gain a better understanding of what you have to spend and while it ensures you do not overspend and can live comfortably within your means, it can also remove the pressure of worrying about money and give you more freedom with your finances, stopping you from short-changing yourself on life.
If possible, seeking financial advice can be greatly beneficial when putting together a budget. A financial adviser will be able to help you analyse your expenditure and put together a budget specifically tailored to you, often with the help of a cashflow analysis.
Once you have created your baseline budget, it is a good idea to factor in an additional 10-20% for miscellaneous expenditure. We all experience life’s hiccups where we need to pay an unexpected bill. Having additional expenditure already factored into your budget can allow for this, and if you do not spend the additional budgeted money, you can save it into a rainy day fund ready for when you do need it.