There are a few important reasons to create a budget, hopefully, you’ll seriously consider doing so to improve your personal finances.

1.  Helps Achieve Personal Financial Goals

First, if you have financial goals, as most of us do, you’re going to have a hard time achieving them without a monthly spending plan to help you stay on track.  If your goal is to become debt free, a monthly plan that determines how much money is to be allocated towards debt payments is critical.  Your spending plan or budget also helps avoid over spending. All that over spending takes money away from your personal financial goals such as savings, debt reduction and also inhibits your ability to give.

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2. Is Wise Biblical Stewardship

Second, having a budget is a Biblical principle of Christian Stewardship. God expects us to manage his resources wisely. Over spending, not knowing where you money is going each month and certainly not working to reduce debt or achieve financial freedom isn’t God’s plan for your life.  God desires us to be free to serve him and not have the burden or worries financial bondage brings with it.  If God expects us to be stewards, or managers of his resources, having a plan just insures we’re able to do a better job in managing them.

So then, men ought to regard us as servants of Christ and as those entrusted with the secret things of God. Now it is required that those who have been given a trust must prove faithful (1 Corinthians 4: 1-2)

3.  Reduces Anxiety

You’ve heard of people mention they’re stressed over not having enough money, or anxious about upcoming expenses.  There is often debt that makes the situation even more difficult.  Whether you realize it or not, having a plan reduces anxiety.  Why?  You no longer have to  concerned with how you’re going to meet those future spending needs (the cause of the anxiety) because a plan, or a budget, provides you the opportunity to make decisions about how you’re going to use your money.  At the end of the day, it’s your choice as to how you’re going to spend the money.  So, creating a purpose for every dollar at the beginning of the month is the key to reducing stress and money issues.

4.  Improves Communication in Your Marriage

A budget can also serve as a communication tool and a way to insure both you and your spouse are on the same page with how money is going to be spent.  Have you ever been in the situation where both you and your spouse unexpectedly spent a large sum of money without each other knowing about it?  It might even have caused you to overdraw your checking account.  This often occurs because there isn’t a plan in place in which you both create together and communicate about every month.

5.  Sets a Good Example

Finally, as your children get older they may have the opportunity to participate in the family finances.  After all, money doesn’t grow on trees and they need to start learning that from an early age.  One of these days you may want to sit down with your teenager (or even younger child) to walk them through your plan.  Show them how you save and give money.  And definitely show them you have limited money for entertainment purposes.

I hope you consider these reasons important enough to establish a budget.  Can you think of other reasons?

Photo credit: kenteegardin

Uncertainty in your personal spending plan

As a project manager, I know that when you start a new project there is some uncertainty in the beginning as to the level of effort, or actual work and the duration, or time the project will take to complete.  This is commonly referred to as the cone of uncertainty.  The further you get into the project; work required and duration become clearer.  The cone becomes narrower.  And at the completion of the project you know exactly the level of effort and time it took to complete the project.

I think the same principle can hold true for budgeting.  At the beginning of the year, there is some amount of uncertainty as to how much money you will spend for the year.  Some expenses are easier to estimate than others.  For example, you know how much your mortgage is going to be for the entire year unless you refinance or sell your home.

The cone of uncertainty is much larger at the beginning of the year for expenses such as gifts you need to buy, gasoline, etc.  As with projects, the expenses are only absolutely known when they occur.  But, to manage money wisely, we have to have some baseline estimate to plan for these expenses.

Reestimate personal spending plan

To manage the uncertainty in projects, the project has to be estimated again at certain points along the way in order to properly manage expectations with stakeholders and determine if you’re on track.  The same is true with a budget or spending plan.

It’s a good approach to create a plan at the beginning of the year based on what you expect to spend for fixed and variable expenses.  You can use last year’s variable expenses averaged across 12 months to come up with an initial amount for each expense.  And to build a safer margin to minimize underestimation, you could use the 12 months average plus a 10 – 20% contingency.

Now as with projects the spending plan needs to be estimated again.   I’ve found the best time to estimate again is before the next month begins.  By revisiting your plan 12 times throughout the year you will become a much more accurate estimator of your expenses.  Close tracking and cash flow management throughout the month with personal finance software or a good expense tracking form will also help.

Advantages of creating a monthly spending plan

The advantage to creating a new spending plan every month or estimating the previous month’s plan again, is you get an opportunity to reallocate spending to meaningful goals versus spending it.  For instance, if you were to have an extra $100 in your budget for the month because current expenses for the month were lower, you might not notice unless you were paying attention.  This money, as you probably know, quickly disappears.  In other words, you’ll always find a need for it unless you’re conscious of it.

As the plan is estimated again for the next month, the surplus can be easily identified before the month and a purpose for the surplus can be found beforehand.  You are now conscious of the money, know its purpose and can put it to use versus letting it dwindle away.

I think the key to managing a good spending plan is managing the cone of uncertainty.  Narrow the cone by estimating your budget each month and perform good expenses tracking and cash flow management throughout the month.  Such actions lead to paying off debt, building an emergency savings fund, and saving for some of the fun things in life too.

How often do you plan your spending and manage the cone of uncertainty?

Picture by David Trowbridge.