Reasons to budget
Why budgeting matters, and what it helps you achieve.
A budget is just a plan for your money: what is coming in, what is going out. Budgeting is worth the small effort because it keeps you in control, stops overspending, and helps you reach goals on purpose rather than by luck. Every pound gets one job, and a budget is how you decide what that job is.
What a budget is for
A budget is a plan for your income and your spending. The reason to bother is simple: it puts you in control. Instead of getting to the end of the money and wondering where it went, you decide in advance where it goes.
Budgeting helps you reach financial goals: building savings, making a big purchase, planning for a life event, paying down debt, or getting ready for retirement. It also helps you avoid overspending, because you can see when you are about to run short before it happens.
Disposable, discretionary and opportunity cost
A couple of terms make budgeting clearer. Disposable income is the money available after direct taxes and deductions. The money left after essential spending is sometimes called discretionary income, and that is what you can choose to save or spend.
Every choice also has an opportunity cost: money spent on one thing cannot be spent on another. Buying the trainers means not putting that money towards the concert. Budgeting makes those trade-offs visible so you choose on purpose.
Goals and the state you start from
Financial goals shape a budget: knowing what you are aiming for tells you how much to set aside. To reach a goal it helps to set a target and a timescale, then work out how much to put away each month.
Where you start matters too. Pre-existing debt affects the choices you can make, because repayments have to come first. A budget is honest about that, which is exactly why it helps.
- 'Budgeting is only for people who are short of money.' It is for anyone who wants to reach a goal or stay in control. People on good incomes overspend too, and a budget is how you make your money do what you want.
- 'Disposable income is whatever is left after my bills.' Not quite. Disposable income is what is left after direct taxes and deductions; the money left after essential spending is discretionary income.
- 'A budget stops you enjoying your money.' The opposite: it makes room for the things you want by planning for them, so you can spend without guilt or nasty surprises.
Key terms
- Budget
- A plan for your income and your spending.
- Disposable income
- Income available after direct taxes and deductions.
- Discretionary income
- The money left after essential spending.
- Opportunity cost
- What you give up when you choose one option over another.
- Financial goal
- Something you are planning and saving towards.
Check your understanding
- What is the difference between disposable income and discretionary income?
- What is an opportunity cost?
- Give one way budgeting helps you reach a goal.
Show suggested answers
- Disposable income is what is left after direct taxes and deductions; discretionary income is what is left after essential spending.
- What you give up when you choose one option over another: money spent on one thing cannot be spent on something else.
- It lets you set a target and a timescale and plan how much to put aside each month.