09The primary purpose of a budget is to track your income and expenses. Your budget also ensures your bills are paid on time, helps you plan for the future, helps identify any bad spending habits or areas where you could reduce your spending, and ensures that your spending reflects your priorities. By creating a budget and sticking to it, you can ensure your needs are covered, your bills are paid on time, get out of debt, and meet your financial goals.
Budgeting Puts You in Control
For the longest time, I had no clue where all my money went. I just knew I didn’t have any at the end of the month. So, I racked up a bunch of credit card debt.
When I was drowning in debt, I felt like I worked for the credit card companies. After rent, food costs, and utilities, most of my money went toward my card balances. I felt like I had no control over my spending or finances. That was until I started budgeting.
Budgeting is essential because it gives you an accurate picture of your finances to figure out your goals and work toward them. When I finally turned to budgeting, my top priority was getting out of debt.
Following the plan I mapped out for myself gave me hope. There were some rough spots, but I was seeing progress, which motivated me to stay with the plan. I finally felt like I was in control of my bills, not the other way around.
Budgeting Takes the Stress Out of Money Management
Which is more stressful: paying all your bills on time or going on a shopping binge and having no idea how you will pay your credit card bills when they arrive?
How many hours of sleep have you lost worrying about money? Uncertainty is stressful. Knowing is not stressful at all. When you create an intelligent budget, the nights of tossing and turning are over.
A budget is like having all the answers to the test beforehand. You know where your money is going and when before you get paid. When a bill comes in, you already know how to pay it.
Budgeting Gets You and Your Partner on the Same Page
Ever argue with your partner about money? Experts cite money as one of the top reasons for divorce.
When two people who are used to managing their money on their own get together, they bring their ideas about personal finance to the table. Combine their finances, and there’s bound to be disagreements.
Maybe your spouse wants a new car every 2 years, but you’d rather drive your current, fully paid-off car until it dies. Or perhaps you’re OK with carrying a credit card balance and paying interest while your partner always pays their balance every month.
You probably won’t agree on everything, but budgeting holds each partner accountable in marriage. Working together to set a budget and stick to it focuses your attention on building a life together rather than fighting over money.
A Budget Helps You Build an Emergency Fund
Life throws many surprises your way. Not all of them are fun, and many of them are expensive. Can you handle a significant, unexpected life event or expense?
Things like job loss, illness or injury, or major car problems can lead to financial issues and problems you’re already facing. There’s never a perfect time for emergencies like these, but the best thing you can do is prepare.
Creating an emergency fund of three to six months of living expenses is essential to your financial well-being. In times of trouble, you’ll have some time to recover.
Using a budget gives you a solid grasp of how much you need to save in your emergency fund. It also provides a plan for putting money into your emergency fund until you reach your goal.
A Budget Gets You Out of Debt Faster and Keeps You Out
Nothing ruins your financial future faster than bad debt. By bad debt, I mean debt you take on to buy things that are quickly used up, rapidly lose their value, or do not generate any long-term income or profit.
Once you’re on a budget, your bills will be on track, and you’ll spot opportunities to reduce your spending. Add money toward your debt payoff strategy as you cut from one category or expense.
The amount of interest you pay over time on credit cards with interest rates of 18-25% is jaw-dropping. If you’re paying the minimums or carrying balances, getting on a budget and paying down your debts might be the best way to improve your financial outlook.
Budgeting Helps You Live Within Your Means
With easy access to credit, it’s easy to overspend. Some people don’t realize they’re doing it until they’re up to their eyeballs in debt.
When you create and follow your budget, you don’t spend money you don’t have. You know how much you earn, how much you can spend, and how much you can save.
Is living below your means as fun as going on a wild shopping spree or a lavish vacation? Not in the short term, but the party’s over when the bills come due.
Budgets Help You Find Ways to Cut Your Spending
A budget forces you to examine your day-to-day spending. You’ll likely identify multiple ways you overspend once you track your expenses.
Maybe you’ll find you spend more money on groceries than you thought. Or you realize you could save a lot if you cut back on entertainment, meals out, and unused subscriptions or memberships. You might even decide to lower the cost of essentials like utilities, insurance, and mobile phone plans if you switch providers or make minor changes like not leaving lights on when you leave a room.
Once you start a budget, the unnecessary and wasteful spending you uncover is eye-opening. The extra money you free up can go toward one of your goals.
A Budget Allows You to Save for Major Purchases
We all have significant purchases that we need or want to make. We often need to save up for them before buying them. If you want to buy a home, a new car, or return to school, you probably need to save first.
Budgeting makes saving for a specific purchase easier than coming up with the money all at once or putting aside money only when you have extra cash. You can divide the amount you need by 12, then set aside that amount every month. Treat the savings goal like any other expense you have to pay. You can afford to purchase without borrowing at the end of the goal period.
If you’re struggling with your finances, your budget can also help determine whether the time is right for making a large purchase. Maybe twelve months is too short, and twenty-four months is more realistic. Or perhaps your budget shows that a decent used car is within reach, but saving for a new car would take longer than you can wait.
By reviewing your budget, you might find ways to trim your spending or think of ways to earn more money to afford the high-ticket item on your timetable.
Sticking to a Budget Enables You to Reach Your Financial Goals
No matter what your goals are, sticking to a budget can help you get there. Your goals can include creating an emergency fund, getting out of debt, or getting a month ahead on bills. However, achieving financial goals requires consistency.
For example, if you set a goal of saving $6,000 in the next year, you know you need to save $500 per month for the next 12 months. You can then work that $500 of savings into your budget. Hitting your goal becomes a matter of staying with the plan.
You may have loftier or longer-term goals, but the principle is the same regardless of the time. Work out how much you need to save each month, make it part of your budget, then follow it.
Budgets Help You Build Wealth and Save for Retirement
Financial stability begins and ends with your savings. Your budget will ensure you don’t neglect to put money aside in a savings, retirement, or investment account. Paying yourself first and saving money every time you get paid instead of spending it all is how you generate wealth and financial freedom.
It doesn’t matter if you save $5, $50, or $500 monthly—the habit of saving every month matters. As your financial picture improves, you can increase your monthly savings.
The Purpose of a Budget
The purpose of a budget is to give you an accurate picture of your income, expenses, and savings. Budgeting has the power to reshape your thinking and your financial life.
With a realistic budget, you won’t have to live paycheck to paycheck. If you frequently overspend, budgeting will get your spending under control. You’ll have your goals clearly defined and a roadmap for achieving them.
It doesn’t matter what kind of financial shape you’re in. Everyone can benefit from budgeting.
It doesn’t matter which budgeting technique or methods you use or whether you use pen and paper, a spreadsheet, or budgeting apps like Mint or YNAB. If you’re not budgeting, the best time to start is now.
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.