Different families handle money differently and have unique views on money management. However, most will agree that you will be a lot better off with the proper usage of your finances. There are many benefits of budgeting, and we will go over the six most important reasons why you should start budgeting.
Budgeting doesn’t mean you should cut on everything and start surviving on instant noodles. It shouldn’t stop you from enjoying life, but instead, it should teach you to enjoy it when you want to without useless spendings. Budgeting isn’t an easy task for many families. You can start budgeting the old fashion way with a pencil and a spreadsheet or use budgeting apps to simplify it. Either way, the final result will pay off with these significant benefits:
- Avoid Deficit Spending
- Long Term Goals
- Kill Bad Spending Habits
- Prepare for Emergency
- Save for Retirement
- Control Over Money
Benefits of Budgeting
1. Avoid Deficit Spending
One of the most essential benefits of budgeting is not to spend in excess of revenue. Even though the family is a nation in miniature, you can’t print more money. Jokes aside, over 70% of Americans overspend and have some kind of debt (mortgage doesn’t count). This rule is especially relevant for credit card lovers. There is nothing wrong with using a credit card if you do it responsibly and have a plan to pay it off later. However, often, people swipe the card without thinking that they will need to pay for it later. If you’re following a specific budget plan, you know your income; you know how much will go towards “non-negotiable” expenses like mortgage, insurance, etc.; and you know how much is going into savings/investments and how much is left after all. Will all that in mind, it would be harder to overspend.
2. Long Term Goals
Budgeting is a great assistant on the way towards your financial goals. If you buy everything you want and that looks appealing, how can you save for a well-deserved vacation, buy a new vehicle or save for a downpayment? You may think no big deal if you spend a little here and there, but these can add up into something meaningful, and a year’s worth of un-needed purchases might cost you a vacation. As we all know, to save without a plan is very short-term. Create goals and save on unnecessary purchases.
A short-term goal can be a purchase of a new electronic device or paying off your debt.
A mid-term goal can be a purchase of a new vehicle or planning a family vacation.
A long-term goal is what should keep you motivated and keep you going. Plan an early retirement, buy a new house, open up a business, travel, help your kids with college expenses, etc.
All that won’t be possible without proper budgeting. A responsible and disciplined attitude towards money can open doors to new opportunities and help you reach goals.
3. Kill Bad Spending Habits
The biggest obstacle on the way of budgeting is bad spending habits. Some of the most common mistakes people make is putting it all on credit. Psychologically is a lot easier to purchase with a card than pay with cash. If you find yourself making a lot of unnecessary purchases, try avoiding credit card purchases until you really get into budgeting. Impulse buying is another issue. Have you ever walked into a store with a plan to purchase one item but walked out with something else? It happens very ofter and can “burn” your wallet. Subscriptions is a huge one. Most people that are in debt fall into that trap. Stop for a moment and write down a list of all your subscriptions. I can guarantee there is something that you don’t use anymore, and it just eats your account. Needless clothes that you only wear a few times. It’s easy to spend a lot of money on something that you found appealing for a moment, but will you actually wear it regularly? Entertainment and eating out is probably taking the biggest chunk that could go towards savings and investments. The best and most effective way to kill bad spending habits is to create a new habit. Cut on small things that barely bring any joy and focus on a much bigger goal that can bring a lot of value and satisfaction.
4. Prepare for Emergency
None of us like to think about emergencies, but it’s a good idea to have something for a rainy day. Some things are beyond our control, and all we can do to make it easier is to prepare for it. Laid off from work, sudden illness, car accident; are just a few examples that can have a significant financial impact. It is important to consider these things when creating a budget. Set aside a certain amount that can keep you afloat for at least three months in case of an emergency.
5. Save for Retirement
One of the things that we can be certain about is that we will get old and won’t be able to work as efficiently as right now. Thinking about retirement shouldn’t scare you but encourage you to take action to secure income for times when you get old or need to retire. Not only you will sleep better knowing that you’re financially set for the future, but you will also enjoy life if you can afford to pay for your expenses. If you’re not managing your finances properly and living one day at a time, you’re leaving your future up to a chance. Create a budgeting plan, and you will reap the benefits very soon.
6. Control Over Money
Last but not least is control over your finances. Even if your income is greater than your expenses, that is not enough. If you can avoid deficit spending, that is a great start, but it’s only enough to drift on one spot. Take your finances under control and spend only on the things that you planned ahead of time. After all payments are made, set a specific percentage of your income to go towards your savings and a specific amount towards miscellaneous purchases. When you are just getting into budgeting, keep this in mind: if you’re not sure where your money went at the end of the month, you need to make adjustments to your budgeting plan. You should know exactly how much went towards rent/mortgage payments, bills, food, savings, and everything else. The benefits of budgeting overweigh the inconvenience you might feel at the beginning of your budgeting journey and will enhance your life.
How to Start Budgeting
In the previous section, we described the benefits of budgeting, and now it’s time to explain how to start budgeting if you’ve never done it before. There are three main methods people come to when it comes to money management. The good old paper and pencil, more advanced excel spreadsheets, and automated budgeting plans on your smartphone. The last one is probably the most convenient and easy to start with. We used a hands-on approach and revealed our choice of best budgeting apps by the ease of use, convenience, reviews, and cost. However, the goal of this section is to go over the first steps so you can start budgeting right away.
Set your goals
Saving and budgeting just to live a frugal lifestyle is not fun, and won’t get you far. Setting some goals for yourself is what will help you with budgeting.
- Think about something that you want to purchase or achieve in the next several months to several years.
- Break it down in three categories: Short-term goals (6-24 months), mid-term goal (2-4 years), long-term goals (5+ years). These will depend on your income and current financial standings.
- Write it down somewhere or create a spreadsheet to keep it more organized and remember it for longer.
- Write down how much it will cost to reach this goal, how much you already have specifically for this goal, and how much you will have to put down monthly to achieve this goal. Once you have everything written/typed in, you will know exactly where you are and what it takes to get there. * Here is an example you can use for inspiration.
Try to maximize your goals. The harder your goals are, the harder it will push you to work towards achieving these goals.
Know your monthly income and expenses
Now its time to structurize your budget plan. List all your income sources: salary, pension, dividends, alimony, social security assistance, etc. All regular streams of income should go here. In the separate column, list all monthly expenses. Rent/mortgage, food, insurance, car payment, medical expenses, bills, cellphone service, internet, gas, maintenance, clothes, school supplies, entertainment, presents, etc. Try to be as accurate as possible and list everything you can think of. This step is crucial in budget planning. The items you have listed above should be as close to the minimum as possible. Try to avoid rent that you cant afford. Don’t lease a car that you know you will struggle to pay off. Don’t buy designer clothes if that will hurt your wallet. If you don’t want to sacrifice these things, it will take a lot longer to reach your financial goals.
“We buy things we don’t need with money we don’t have to impress people we don’t like.”
Dave Ramsey
Try to watch your expenses and spending habits strictly for the whole month. At the end of the month, you will need to analyze it and make adjustments with the goal in mind: to remove all unnecessary expenses and save on essentials. Remember, no one has a greater interest in your future than yourself.
Saving & Emergency Funds
Once you know all your expenses and revenue streams are set, you should start setting aside for saving and emergencies. Yes, you should keep these separately. A good emergency fund is about $2k. An amount that should be enough to fix a car or pay for a doctor’s appointment. Savings are more significant. The right amount would be three months of living expenses in case you need to go through a severe injury where you can’t work or loss of a job. These two funds are separate from each other and from the “goals funds” you have created earlier.
Final word
A proper financial budget should help you get out of debt and reach your financial goals quicker. How can you fix a problem if you don’t see it? How can you achieve something if you don’t set goals? Without full control over your finances, you can’t see a big picture of your finances, and it’s easy to spend your hard-earned money with no purpose. Set goals, create a budget, follow the plan, achieve more!