You work hard to earn a living. You should make sure you spend the money you bring home wisely and that’s where a budget comes in. It’s a good tool to see at a glance what you have coming in, what’s going out (and what the money is paying for), and if there’s anything left at the end of the month to put into savings.
Before we dive into exactly what a budget can do for you, let’s consider for a minute what will happen if you’re not tracking income and expenses. You may end up spending more than you’re making in a given month (or two, or three). Over time, that can put you into some pretty hot water financially. You may also spend a lot more than you’d like to believe in things like eating out, going to the movies or new clothes.
Having a budget gives you more control over where you want to spend your hard-earned cash. Maybe that’s dinner and a movie, but maybe it isn’t. Wouldn’t it be nice to have an actual choice?
Below are 10 reasons why you need a budget and some tips on how to stick to a budget.
1. It Tracks Where Your Money Is Going
Many misconceptions about having a budget mean you can’t spend on things that you love. A budget simply tracks your money. You record where the money comes from each month (your income) and then write out everything you spend it on (expenses), starting with your regular monthly bills like mortgage or rent, car payments, utility bills, etc. What’s left after all the bills are paid is your discretional income.
2. Helps You Identify Things You Waste Money On
Having it all laid out in front of you in black and white helps you identify things you’re wasting your money on.
It makes you reconsider if you want to spend well over $200 a month on Cable TV or $150 on your large cell phone plan. Or how about that yearly magazine subscription to something you no longer read? Go through your expenses and reevaluate if this is really how you want to spend your paycheck.
3. Allows You To Be Proactive About Savings
Saving money without a budget is hard. You go in with the best of intentions at the beginning of the month, but somehow there isn’t anything left at the end of the month.
A budget gives you a chance to be a bit more proactive. Set aside some money for savings at the beginning of the month, even if it’s just $20. Put it in the budget as a regular expense, just like you do with your other urgent bills.
If you need to, open separate savings account so you’re not tempted to spend it. CIT bank offers high-yield savings accounts. Their high-yield savings builder account allows you to accrue interest on your money. Instead of letting your money sit in a low or no-interest checking account, you can put your money to work for you. You can open a savings account here.
4. Ensure You’re Not Spending More Than You’re Making
Most importantly, your budget will keep you on track and help you make sure you’re not spending more than you’re making. And I don’t have to tell you that that’s pretty important for your financial wellbeing.
Many people find themselves using their credit cards in between paychecks because they’ve overpent. As a result, many are drowning in credit card debt. A budget will keep you in check and prevent overspending.
5. It Helps You Stay Motivated
After you’ve become used to tracking your expenses with a budget, it can start to get addictive. Having control over your money gives you a feeling that you can’t explain. You finally have control over your money! When you see your debt decreasing and savings increasing, it’s motivating to keep going. There’s no better feeling than financial security.
6. It Sets You Up For A Comfortable Retirement
Many people often put retirement on the back burner, thinking “I’ve got plenty of time to start saving for retirement”. What often happens is, life gets in the way. If you get into the habit of putting away for retirement when you’re younger, it won’t seem like such a huge sacrifice. Plus, your funds will gain way more interest if you start saving now than waiting to get started later.
7. It Helps You Build an Emergency Fund
Most people who don’t have a budget, usually also don’t have an emergency fund. Having an emergency fund is extremely important. In the event of an unexpected event such as job loss, medical emergency, a death in the family, or your car breaks down, you want to make sure you’re prepared.
Ideally, you should have three to six months of living expenses in your emergency fund. That way, when the unexpected does happen, using that money is just a slight inconvenience and won’t put you in a bad position financially.
8. It Helps You Avoid Debt
Once you’ve got the hang of budgeting, you’ll be able to have more money saved and also pay off debt easier. You will be able to plan your expenses, figure out what you need to do to get out, or stay out of debt and it’s less likely you’ll turn to credit cards.
9. It Allows You To Be Flexible
Sometimes unexpected things that are not emergencies can arise. Maybe the toaster oven stopped working, or you forgot you needed to buy a birthday gift for a friend. Budgeting easily allows you to adjust money in various categories in your budget.
You may decide to reduce your restaurant fund or decide to buy the pair of shoes you wanted next month instead. Try to avoid touching your savings if you can.
10. It Gives You Control
As I said earlier in this blog post, budgeting will give you a feeling of control over your money. You are telling your money where to go. By tracking, saving, and prioritizing, you reduce overspending, maintain control, and build your savings. As you get better at budgeting, it will become much easier to manage your money and curtail your spending.
Now that you know why you need a budget, here are a few tips to stick to that budget.
- Download a budgeting app to keep track of your expenses in real-time throughout the day.
- Create an excel spreadsheet and update it daily.
- Get rid of credit cards.
- Take some time to think about large purchases. Do you need it? Can you save monthly to get it at a later time? Is the benefit worth the cost?
- Create a zero-based budget. This means you budget your entire income down zero. You give every dollar a job (whether it’s mortgage payment or savings). This way, you don’t give yourself any room to spend. If you want to take complete control of your finances, this may be the method for you. It will require sacrifice and willpower.
- Plan your meals. Eating out is often one of the places we all overspend.
- Write a grocery list and stick to it.
- Treat yourself. Budgeting can be fun if you want it to be. Set certain milestones and when you’ve reached them, treat yourself to something nice. You deserve it!
Budgeting is a great tool to use to reach your financial goals quickly. However, it’s not just about writing numbers down on paper. Budgeting requires behavioral and mindset changes. You will need to change your spending habits and the way you think about money.
Generally, it will take at least three months to stick to a budget consistently. It’s okay if you fail and you will in the beginning. Budgeting is HARD. But it shouldn’t feel like a chore. It should be an activity you enjoy. Make the process fun – reward yourself when you reach milestones or turn it into a game of sorts. One year of sticking to a budget will change your financial situation drastically. You won’t regret it!