Ever thought about the consequences of not budgeting?
For the longest time, I didn’t.
I didn’t budget. I didn’t think about tracking my expenses or budgeting. I never considered the consequences of not budgeting.
When it came to my personal finances, I was just winging it.
I thought I was pretty frugal. I knew I made enough to cover all my bills, yet I still felt broke most of the time.
When my husband and I first got together, he had the same attitude toward money as I did. He made enough money to cover his living expenses and do the things he wanted to do. Financial planning wasn’t a high priority for him then.
Together, we didn’t budget, keep decent records, or keep our spending in check. We had two incomes so that felt like enough financial security. We didn’t live extravagantly, but at the end of the month, we didn’t have a lot left over.
Everything worked out fine, though. Until it didn’t.
We came face to face with some life events we weren’t expecting and the financial challenges that came with them. Suddenly, broke wasn’t just a feeling. It was our painful reality.
We eventually got back on our feet and started rebuilding. Starting a budget saved us. Along the way, we spotted all the mistakes we made.
Here are the consequences of not budgeting you might face:
1. You Overspend
It’s easy to overspend when you don’t know what you actually spend every month or what you can afford.
If you’re not budgeting, you’re guessing. Guesswork as a money management strategy results in spending more than you make, debt, late fees, and hardship.
Before my husband and I put together a budget, we thought we had a pretty good idea of how much we spent each month. We were wrong. With our grocery spending, we were shocked at what we thought we spent every month versus what we really spent.
By not budgeting, you make it much harder to live below your means. Spending first and asking questions later is not a smart approach. Spending more than you earn is a one-way ticket to financial disaster.
Overspending and other bad spending habits are easier to avoid if you build a budget and stick to it. You’ll know at a glance how much you have and how much you can spend.
2. You’re Unprepared for Emergencies
Life is unpredictable and expensive. Job loss, medical expenses, unscheduled automotive expenses, large vet bills, and other surprises can throw your life and your finances into chaos.
You can’t possibly plan for everything. But an emergency fund helps you through those tough times without suffering dire financial consequences.
An emergency fund doesn’t just appear out of thin air when you need it. Budget for it and start an emergency fund as soon as possible. The standard financial advice is to set aside three to six months of living expenses in case of emergencies.
Budgeting allows you to free up money you would otherwise spend and put it toward being prepared. Without a budget that includes saving for emergencies, one unexpected expense can put you in a bad financial situation that might take years to recover from.
3. You Scramble to Pay Bills
You don’t have to consult your budget spreadsheet to know when your rent or mortgage payment is due. The same might be true with other recurring fixed expenses you’ve been paying consistently for a long time. You know when they’re due and approximately or exactly how much you owe.
But what about periodic expenses that aren’t due every month? Maybe your car insurance is paid annually, your dog needs vaccinations every year, and giving your spouse a gift on your anniversary is important to you.
What do you do when those dates draw near? Do you work yourself into a frenzy trying to figure out how you’re going to pay? With a well-constructed budget, you just pay them when it’s time without breaking a sweat.
When you budget, you set aside money for those annual, semi-annual, and quarterly expenses every month. You just have to divide the amount of the bill by the number of months until the due date, then put aside that amount each month. When the bill comes, the money is available for you to pay it without panic.
4. You Can’t Meet Financial Goals
If you have goals like establishing an emergency fund, saving for college, or trying to come up with a down payment, budgeting is essential. A budget is a spending plan that helps you spend according to your priorities.
You only have so much income. If you don’t know where it all goes, it’s hard to reduce spending. If your approach to saving for your goals is to just save whatever is left over at the end of the month, your saving will be inconsistent at best and nonexistent at worst.
When you build a budget, you’ll examine all your spending. You’re likely to turn up things you should stop buying and expense categories where you could easily spend less money. Maybe you decide to cut down on eating out and put that money toward one of your financial goals instead.
5. Retirement Is Not Happening
Even if you love your job, you probably don’t want to have to do it every day for the rest of your life. I think it’s safe to say most people would like to retire young with enough money to live the rest of their life doing whatever they want with their time.
That will not happen if you have no plan or put no effort into achieving your retirement dream.
Even if you have a long way to go before retirement, the best time to get started on saving for retirement was yesterday. Today is the second best time. The longer you wait, the harder it is to get where you want to go.
Not keeping track of where your money goes is no way to secure your future. Build a budget that incorporates your retirement savings goal. Treat your retirement funds like any other bill you pay every month.
6. You Get Trapped by Debt
You might be tempted to buy something you want with a credit card, thinking you can pay it off later. You don’t know for sure, of course, because you’re not budgeting your money. You figure you’ll just deal with it when the bill comes.
Or worse, you run out of cash until payday since you don’t track your income and expenses. So you pay for your living expenses with a credit card.
Then the bill comes.
You don’t have the money to pay the balance in full, so you make the minimum payment. The higher the interest rate, the more costly your initial purchase becomes and the longer it takes to pay it off.
If you just make the $40 minimum payment every month, with an 18% interest rate, your $1,000 balance will take 70 months to pay off and cost you $1,473.51. You can use this credit card minimum payment calculator to see even more scary examples of how carrying high-interest credit card debt can ruin your financial future.
Using your credit cards rather than budgeting for your bills and purchases leads to more debt, higher costs, and default or bankruptcy.
You can avoid the cycle of debt through budgeting. A budget will help you live within your means and get out or stay out of the debt trap. You can ensure that you have the money for your bills and save up for wants or major purchases instead of paying on credit.
If you’re already in debt and you’re not budgeting, you’re making it harder to get out of debt and stay out. Budgeting helps you control spending, set goals, and keeps you on track to meet those goals.
7. Your Credit Score Drops
When you don’t budget, you risk spending more than you earn, going into debt, and damaging your credit. Once you start the cycle of buying things on credit and not paying off the balance when the bill arrives, your credit score takes a hit.
Credit utilization, which is the percentage of your available credit you’re using, is a major component of your credit score. As your balances and utilization rate creep up, your credit score goes down. If you max out your cards and struggle to pay on time as a result, your credit score plummets.
Once your credit score drops, you could have a much harder time in several areas of your life. Employers, utility companies, mobile phone providers, stores, and insurance companies check your credit.
You’ll pay higher fees and higher interest. Service providers might require a deposit or payment upfront. With a bad credit score, you can be denied housing, loans, credit, or even a job.
That’s how costly credit card debt and getting behind on your payments can be. The impact of debt goes beyond paying interest.
Get on a budget. You can avoid debt, pay your bills on time, and keep your credit score high through budgeting.
8. You Have No Control
You work hard every day to meet your obligations and build a good life for yourself. If at the end of the month you don’t know where your money went, you feel empty and unsatisfied.
Where did it go? What was all that effort for?
It feels as if what happens to your money is out of your hands. But it’s not.
A budget makes that awful feeling of being out of control go away. When you budget, you take back control of your financial life.
You tell your money where to go before the month starts. You stick to your budget. At the end of the month, you’ll feel like you’re finally in control of your money, not the other way around.
Your monthly expenses are covered and paid on time. You know where you stand. You can spot opportunities to lower spending, make adjustments, and ensure that you’re always making progress toward your goals.
9. You’re Under Constant Stress
Another of the consequences of not budgeting is stress. Whether it’s debt collectors calling you all the time, facing a bill you can’t pay, or worrying about your finances, money problems cause stress. According to a 2020 study on stress in America conducted by the American Psychological Association, 64 percent of adults indicated that money is a significant source of stress in their life.
The physical and emotional effects of stress are well documented. Chronic stress leads to many health problems. Some of those stress-related health problems are linked to early death.
You’ll suffer a lot less stress if you know where your money is going and how it’s working for you. You can sleep easier knowing that your bills are paid and you’re making progress toward your goals.
10. A Crisis Is More Likely
When you’re living paycheck to paycheck, stuck under a mountain of debt, and have no emergency fund or savings, you’re living on the edge of financial ruin. Unforeseen major expenses could bankrupt you and small changes are magnified.
It’s not just emergencies that can throw you into a tailspin. It’s poor financial planning and not budgeting too. Because you haven’t given yourself any wiggle room, even a slight change in your circumstances or monthly expenses hurts.
Most people wouldn’t classify their car insurance going up 5% or not getting a bonus this year as emergencies. But when you’re stretched too thin and you have no plan, these small things cause big trouble.
With a budget in place, you’re able to see where you should reduce or eliminate expenses. You might compare your income to your spending and decide that increasing your income with a second job is the answer.
Budgeting allows you to see your whole financial picture and prevent a personal financial crisis.
Featured Image Credit: Unsplash
Sara Graham is a frugal living and household budgeting expert. Her writing has appeared on MSN Money, The Good Men Project, Fairygodboss, and several other online publications. She is the co-founder of KindaFrugal.com, a personal finance and frugal living blog.