What is the purpose of a budget? 7 ways a budget can serve you

We throw around the term budget a lot. How to budget, better budgeting, easier budgeting, fitting in your budget…But what is a budget and what is its core purpose? You can’t adopt the best budget for you if you don’t know what goal it is supposed to accomplish for you.

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This post digs into what we (well, atleast I) mean when I talk about budgeting. What is the purpose of a budget, what is the goal of defining one?

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What is a budget?

Well, we have to let the Oxford dictionary weigh in first. There we see two definitions, for the thing a budget is (noun: an estimate of income and expenditure for a set period), and the act of budgeting (verb: to allow a particular amount of money in a budget).

Ok, so, measuring amounts of money coming in and allowances of money going out, during a certain time period. In the setting of personal finance, a budget is often built on a monthly basis. This is typical for a good reason. It addresses the the first order of business with managing personal finances, paying the household bills which are largely due monthly.

Therefore, for any month, a budget is simply your monthly income and how that income is allocated to 1) paying each of the types of bills & debts, 2) putting in savings, and 3) spending. Simple enough.

How to build a budget

However, the way you calculate these items is crucial- to avoid unpleasant surprises and keep things simple enough to be useful.

For my calculations of your Magic Monthly Number, use my free workbook available in the email form below:

In short, a budget is a way of summarizing the allocation of the money that comes into your hands. If it all went to your piggy bank like it did when we were 7, no budget necessary. But because there are (constant) demands on your adult money, the budget becomes a key tool.

But why specifically is this relevant to you? What’s the point besides just general bean counting?

What is the purpose of a budget?

What a schedule does for time, a budget does for money. Can you imagine how it would go if the emergency room supervisor just told staff to come in when they feel like it? Disaster. A schedule makes the right people in the right place at the right time. A budget directs the right amount of money to the right place… (and cash flow planning does it at the right time- definitely check that out here).

Basically, it’s not efficient or effective if you don’t do some level of planning out your resources. Even if it’s a little loose… which brings me to the budget within the budget.

The total budget purpose

The logistical on-the-surface purpose of a budget is to define your collective income and define where that income goes. In other words, what the heck are you working for? Generally, in my approach to money management, your income goes into four buckets.

First, regular bills for life’s needs like utilities, insurance, and various services.

Second, debt repayment, including your mortgage, car loans, student loans, and credit cards or other consumer debts.

Third, the spending your do day to day, week to week.

Fourth, to savings, including investments.

Laying out all these slices of your financial pie together is a great way to see your total financial picture, which provides many benefits. You see your money realize how much of that money you’re working for is going to this and that. Check out my post on building family budget pie charts as a way of visualizing your money today, as well as how you’d like that pie to change down the road.

The first two buckets I mentioned above are relatively fixed expenses. The usual bills are the usual bills. But spending, that’s a different story.

The spending budget purpose (or budget within a budget)

Probably the most important purpose of a budget is to limit spending. Our daily spending behavior affects our money in a maaajor way. So when most people think of budgeting, they think of making a budget for the spending money. In other words, a spending plan.

Conventional wisdom says to divide up your spending money into categories of purchases or services to be allowed in a given month. I budget in a different way, which I think is more flexible, and therefore more successful, with the changing needs of families.

My burn rate budget method is based on a monthly spending cap (that total bucket). From that cap, you determine a weekly burn rate- more on that in the workbook from above, this post, and ultimately the Perfect Budget Secrets – Burn Rate Budget Digital Tutorial.

But no matter how you build your budget, a budget focused on your day to day spending behavior is the “budget within the budget.” This purpose alone is worth budgeting for because the impact of daily spending is so significant to your financial success.

For instance, you could be awesome at making thrifty choices in the car you drive and the home you live in, really high impact stuff. BUT if that freed up money just runs through your fingers on fancier groceries, nicer clothes, a special piece of jewelry, bigger gifts for special occasions, well, you haven’t really gotten ahead in a life-long, financial freedom sort of way.

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The bigger picture goals of a budget

So let’s talk about that life-long, financial freedom sort of purpose. To go a smidge deeper than the surface logistics of why we budget. Ultimately, the purpose of defining a budget is to create a starting point for using money as a tool… to live your best life. If you don’t first define it, you can’t change it.

Here are some specific ways that a budget is your tool to impact your life in a real way:

#1 – A way to specifically control spending

I talked about this above as the budget within the budget. But it is worth repeating. The most fragile piece of your financial picture is your spending mindset and behavior. For one, you go backwards financially when you overspend and accumulate consumer debt (credit card debt, retail purchase loans like furniture, and even car loans). Therefore, the main purpose of a budget is and should be focused here, on spending control. Fixed expenses are dealt with in another way. Debt requires its own plan and is simply a matter of time and math.

To address your spending mindset, read this post about how the intrinsic control of a frugal mindset is ultimately more powerful for good spending habits than any budget. Growing in this direction while you start working within a spending cap or other form of budget should be an important goal.

Because spending money, well, it’s a daily life behavioral issue that must be mastered to keep the whole picture from blowing up. If you master spending control, the rest (i.e., financial freedom!), over time, is practically inevitable.

#2 – A structure for optimizing your income/expenses balance

Listing out a total budget of where all your income goes is an excellent structure from which to optimize. Only when you see that your utilities eat 10% of your income do you think…. hmm, what can I do to make that 9%? Or maybe your giving to your favorite causes isn’t as high as you’d like. So you can squeeze your fixed expenses down by 1% with a different cell phone plan to raise your giving up by 1%.

When you see all of this laid out together, it’s really easy to start thinking this way. And then find ways to produce the shifts you want to see for your money and life. For some ideas on how to optimize each of the four buckets once you have an overall budget laid out, see the lists at the end of this post.

#3 – A tool to plan for change

When you’re facing a major shift in income (job loss, leaving job, big raise, promotion) or expenses (moving to a new home, childcare starting/ending, taking on a car payment), your budget is the place you look to get the birds eye view of how this change fits. When you have all the directions your income goes laid out in front of you, it lets you see all the places you can accommodate or capitalize on this change. The next place to strategize major changes in your money, is your cash flow planning, so be sure to check out this post as well.

#4 – A way to judge “can I afford it” (or “do I want to afford it”)

Just like you can use your budget to plan for a big change, you can also examine how a purchase decision would affect your total money picture. If I finance this car, for $400 a month, it means I won’t have any money to save anymore, or will have to reduce my spending by $200 and cut my savings by $200, etc. How does cutting your savings rate impact your longer term financial goals, like building an emergency fund? Where in your spending plan can you cut by $200 realistically? The budget helps you assess whether you want to make the necessary changes to afford something else. Every dollar is a trade off.

#5 – A way to achieve goals & dreams

A budget is the tool that lets you shift money from bucket to bucket strategically. Ultimately, you aim to shift more away from mundane living expenses and more towards saving money to be spent on best life dream stuff (more on how to do that right here). When you define that $100 (or $1,000) goes to savings/investments every month in a budget, you know you will have $1200 (or $12,000) after a year. That way you can foresee and intentionally plan, step by step, building your best life.

#6 – A way to support your kids’ future

Perhaps you want to send your kids to college, or pay for a wedding, or help with a down payment for their first home. Big choices like this are very personal, but certain choices for your kids can break the debt cycle so are worth considering carefully. When you allocate a slice of your income to achieving that end, it’s budgeting. You can’t suddenly at age 18 say, yep, I’m going to pay for your college without ever having saved any money for it, or having enough income at that point to just do so.

But when they are 8, you can decide to save $5,000 per year (or about $400 per month) for the next 10 years. Using your budget, you build in where that fits from your income, in balance with the rest of your budget parts, and then execute on that set plan. Then it remains a piece of your budget as income/expenses evolve over those next 10 years. It’s the tool to define a financial priority and make it happen.

#7 – A tool to squeeze the most value out of your income & time

Ultimately, the purpose of your budget is to intentionally maximize the life you get out of the money that comes through your hands. Money can flow through your hands haphazardly all over the place as you bounce through life. Or you can intentionally quantify that money and divvy it up to be used to pay off debt, to afford the day to day of living (fixed expenses & essential spending), and to save for achieving more with your life and time, using money to support what you value most.