1. To set and reach financial goals. Once you understand the overall picture of your finances--specifically, identifying how money flows in and out of your life--you can better see how to reach your financial goals. Start by collecting bank, credit card, and income statements for the past six to 12 months. Determine, on average, how much you spend monthly, and break down spending into categories like food, gas, entertainment, monthly household bills, insurance, debt payments, medical expenses, and savings.
2. To spend according to your priorities. If you're in the dark about how much you spend and where you spend it, changing you habits will be difficult. And even if you're financially comfortable, a budget can help you identify unnecessary expenditures and deduce ways to redirect funds towards your priorities. For example, if you don't realize you spend $80 per month on lattes, it will be much harder to break that habit and apply that money toward a priority, such as saving for retirement.
Most importantly, if you're trying to get out of debt, it's essential to budget your limited funds to make debt payoff a priority. To cut back on expenses, you need to first see where your money is going so you can then limit yourself to a specific amount per spending category and utilize a method, such as the envelope budgeting system, to be sure you don't overspend.
3. To build wealth. Once you have a clear view of your overall financial picture, you can shift your focus to aggressively eliminating debts and building wealth. Once I solved my personal debt issues, I was already in the habit of putting a certain amount monthly toward debt. So rather than change that habit, I simply redirected those funds toward my savings.
4. To plan for retirement. Though technically an aspect of building wealth, retirement planning is so vital to your future that it warrants special attention. A recent Harris poll showed that 34 percent of Americans have no retirement savings, and many of those that do have a retirement fund don't contribute enough.
5. For peace of mind. If you don't have a budget, you might not know whether you can afford a new flat-screen TV, a new car, or any other