If there is one single best tool to help you organize and manage your finances, it’s certainly a budget. A budget is essentially your spending plan, a strategy for how and where you want to spend your money. Unfortunately, a lot of people aren’t too fond of budgeting. Even you might already be sick and tired of hearing the very word.
But the importance of budgeting simply cannot be downplayed. It is in fact the cornerstone of personal finance management. This is why financial advisors and other experts on money matters have been preaching about it unceasingly. It is, after all, advice that bears repeating.
If you’re still not convinced of the importance of budgeting, here are nine good reasons why you need a budget.
1. Gives you control over your money
Are you constantly wondering where your money goes to at the end of each month? Do your paychecks disappear as soon you receive them? Are you struggling with your finances all the time? Do you feel like you have no control over your money? Then you, of all people, need to start budgeting.
The importance of budgeting cannot be understated. A budget is undoubtedly the single most important tool to help you manage your money. Its main purpose is to provide you with a full and clear understanding of your financial state, and with this understanding, enable you to make prudent decisions with your money.
A budget helps you keep track of how much income you are bringing in, and how and where you spend it on. It sheds light on your spending behavior and the nature of your expenses. This awareness allows you to make the necessary changes to the way you handle your money.
Budgeting gives you control over your personal finances. With a budget, you are being intentional and deliberate with the way you use your income. You are giving each dollar of your hard-earned earnings a purpose. You decide how much of your money goes to pay for what expense, and what costs must take priority. With a budget, you ensure that you always have money for the things you need and the things that matter most to you.
Through budgeting, you can rein in your spending, prune unhealthy spending habits, and save more money. It can help keep you out of debt, or if you currently have debt, help you work your way out of it. Over all, when it comes to making smart choices with your money, a budget is your best bet.
2. Reach your financial goals
A budget is not meant to help you control your money simply for the sake of controlling. Rather, a budget is designed to help you control your money towards a purpose, and that purpose is to fulfill your financial goals.
So, whether your goal is to buy a car or a house, set up an emergency fund, save for a comfortable retirement, pay off all your debts, or launch a business, the importance of budgeting is apparent.
A budget is essentially your plan of action to meet your financial goals. It gives you a clear idea of where you are starting financially, and what steps and actions you need to undertake to get to where you want to be. Through budgeting, you can plan for how much you money you need to set aside and how long you need to save in order to reach your goals.
Because a budget gives you control over how you use your income, it enables you to maximize your spending to ensure that your money is allocated to fund your financial objectives, instead of being squandered on meaningless and unproductive expenses.
Moreover, a budget keeps you focused. It enables you to measure your progress and see if you are anywhere near your objectives. It allows you to make the necessary changes to ensure that you are always on track to meet your financial goals.
For instance, if you find that you will not meet your retirement savings goal with your current allocation, you can adjust your budget and increase the allotment towards your retirement plan. Or if you decide to start a business sooner than you initially planned, then you can modify your budget and direct more money to fund your entrepreneurial venture.
3. Stop overspending
If you disregard budgeting, you are more likely to overspend. Because you are unaware of your spending habits, you are likely to underestimate your expenses and spend money you don’t have on things you don’t need or can’t afford. As a result, you might resort to debt to cover spending gaps.
The importance of budgeting in putting an end to overspending cannot be discounted. A budget lets you keep track of your expenses, and so gives you a clear picture of where your money is actually going. It helps you understand your spending behavior, and pinpoint your extravagant spending habits and what nonessential costs take a toll on your income.
Without a budget, you might not have realized that you are spending too much on your daily morning caffeine hit. Or that going out for lunch everyday is actually costing you far more than you thought it would.
A budget helps you maximize your income. Because you only have so much money to spend, you become more discerning of your expenses to ensure that every dollar of your income is used efficiently.
With a budget, you learn how to prioritize your expenses. You can better identify what expenses are essential and what are not, and what expenses need to take priority and what you can cut back on or completely eliminate. You also become more careful with your purchases. You put in the time and thought to every purchase you intend to make, instead of buying out of impulse.
Over all, a budget enables you to live a lifestyle within your means. Through budgeting, you can project and plan your expenses to ensure that your income is enough to cover your needs and to meet your financial goals without resorting to debt.
4. Prepare for emergencies
There is no telling what the future holds. It might bring boon, or it might bring bane. Regardless, it is best to always be prepared. Planning for the unexpected is one of the key concepts of personal finance, and here the importance of budgeting is most evident.
Budgeting allows you to prepare for emergencies that can leave you financially worse off. With a budget, you can set up an emergency fund or a rainy day fund – a safety net meant to cover for temporarily lost income or to pay for unexpected but essential purchases.
Imagine needing major repairs for your house, but you will not be receiving your paycheck for another week or so. Imagine getting sick all of a sudden, but your insurance will not cover your medical costs. Imagine losing your job – your only source of income – one day, and you know it will take you weeks, maybe even months, to find another job
Allocating money for an emergency fund and making it a priority in your budget helps you prepare for just such contingencies. With an emergency fund set up, you don’t need to dip into your regular savings account or even borrow money in case of financial emergencies. Besides, knowing that you have an emergency fund to tide you over should the worst happen gives you peace of mind and a sense of security.
With a budget, you can build up an emergency fund in a consistent and automatic manner, and ensure that your emergency fund is enough to cover at least three to six months’ worth of living expenses.
5. Save for a comfortable retirement
How do you envision your life after retirement? Sipping margaritas on a tropical island paradise? Sunbathing on a yacht off the Grecian coast? Traveling to a new country every month? Starting your very own business? Or perhaps living a pleasant life in a country house by the lake?
However you envision your life after retirement, you need money to make it come true. You might decide to stop working altogether. In that case, having enough money saved up will allow you to spend your remaining years in relative comfort. Or you might decide to continue working in a part-time capacity to help offset some of the costs of living. Regardless, planning in advance can ensure that you have sufficient funds to guarantee a comfortable retirement, and here the importance of budgeting cannot be denied.
Without a budget, you might not realize how important it is to save for retirement until it is too late. Instead of setting aside money for your retirement savings plan, you might be tempted to spend it on things that give you short-term satisfaction, and so jeopardize your retirement goals.
Your retirement years may be the best years of your life, or the worst. What you do between now and your very last day of working largely determines how pleasant your life is after retirement. So if you want to live your latter years comfortably, make sure you prepare for it.
Through budgeting, you can plan for your future. A budget is an effective tool to ensure that you never neglect saving for your retirement. It allows you to build up your retirement funds in a consistent and automatic manner, and as early as possible. It also allows you to track if you are saving enough to fulfill whatever visions you have of your retirement.
6. Pay off debt
The importance of budgeting is not solely limited on regulating your spending and organizing your savings. It is also crucial in keeping you out of debt, or in helping you manage your debt load, if you have.
Central to any effective debt management plan is a realistic and appropriate budget. With a budget, you can allocate money towards debt repayments in a regular, consistent, and timely manner. You can decide the amount you need to set aside for your mortgage payments, student loans, or whatever debt you have incurred. Because you can control your spending, you can reduce or eliminate unnecessary costs and divert the freed up money to help pay off your debts faster.
Through a budget, you can prioritize what loans need to be repaid first. There are two main strategies for debt repayments. The first is the debt snowball method, where you settle your debts according to their size, regardless of interest rates. You pay off debt with the smallest balance first, while making only the minimum payments on the rest. By settling smaller loans first, you can eliminate several of these early on.
Once your smaller loans are paid off, you can devote more money to repay your larger balances. Seeing your progress ‘snowball’ as you clear your loans from smallest to largest is psychologically rewarding and can keep you motivated to work your way through to your last and largest debt.
In contrast, under the debt avalanche method, you pay off your debt with the highest interest first while making only the minimum payments on the rest. Once you have cleared your highest interest rate debt, you move on to the next highest interest rate, and so on and so forth. With this method, you can save money from reduced interest rates.
7. Make more money
A budget is not only meant to help you manage what money you have. It can also be used to increase your income and build your wealth. Through budgeting, you can trim spending, free up money, and use that to take advantage of investment opportunities.
Investing is lending your money out to an individual or an institution in the hopes of making even more money. You can earn dividends from investing in stocks, interest from bonds, or rent from real property you lease out. And over time, your investments that have grown in value can then be sold at a profit. So investing is really about making your money work for you.
Having financial investments is important because it can help offset the corrosive effects of inflation (so-called the silent wealth killer), help you save for retirement, create multiple streams of income, and build wealth.
The importance of budgeting in investing is immense. With an effective budget, you can work out a prudent and consistent investment strategy. You can decide how large a part of your income you want to invest and how often. You can decide how much money you need to set aside for your retirement plan, and to purchase stocks, bonds, mutual funds, real property, or other investment vehicles.
Keep in mind, however, that unlike saving, which involves little to no risk, investing always involves risk. There is a very real chance you will lose some or all of the money you invest. So, to reduce the risk associated with investing and increase your chances of turning a profit, you need to understand how investing works and master the principles of risk management. And just to be safe, only invest the money you can afford to lose.
8. Stop worrying
Through budgeting, you control your money, and not the other way around. You have a clear picture of your financial affairs. You know how much money you are making and how and where you spend it on. You don’t have to worry where your money goes to at the end of each month, wonder why your income disappears as soon as you receive it, or struggle to stretch your paycheck to make it last long enough for the next one.
With a budget, you can manage your income the way you want it, the way it should be. You can plan for your expenses and see to it that your income can pay for them. You can ensure that you always have money for the things that you need and the things that matter most to you. You can avoid overspending by eliminating unnecessary costs, abolishing unhealthy spending habits, and living a lifestyle within your means.
Moreover, with a budget, you can prepare for emergencies and plan for your retirement. You can save money to fulfill your other financial goals, and even have enough to start and sustain a prudent and profitable investment strategy. You can pay off all your debts, and ensure you never fall into debt traps ever again.
The importance of budgeting is apparent not only on your financial well-being. It is evident, too, on your overall quality of life. The knowledge that you are always on top of your finances, and that you need not worry about struggling with your money ever again, gives you the confidence to get on with your life with ease and comfort. You gain peace of mind and a sense of security. You reduce stress and increase your happiness.
9. Have fun
A common misconception among people who disregard or even disdain budgeting is that a budget limits the freedom and restricts the fun you have with your money. They believe that if you budget your money, you lose your control over it – you can no longer buy whatever you want, whenever you want. You’re no longer allowed to spend it enjoyable things, like travel, eating out, and other entertaining and leisurely activities.
This is simply untrue. Budgeting is not restricting. On the contrary, it is freeing. It enables you to free up your money, so that instead of it being wasted on nonessential expenses, you can use it to provide for your needs, grow your savings, and have fun with your life!
Remember, with budgeting, you control how you spend your money. So there is no reason not to have fun when you budget. The key is to include it as a category in your spending plan.
You can actually designate money for pleasurable purposes, like travel, eating out, or whatever leisurely activities you want, as long as you prioritize your essential expenses and savings allocations first. So go ahead, save for your travel goals, as long as you remember to first build up your emergency fund and not forget to put money on your retirement savings account.
Besides, you actually have to live on and by the budget that you create. It makes no sense if you make your budget too harsh and too austere. If you do that, then you’re only setting yourself up for failure. So always be honest with yourself. Keep your budget realistic, and fun, too!
One final thing…
The importance of budgeting in helping you manage your finances cannot be understated. However, you need to remember that a budget is only a tool. Yes, it matters how realistic you make it, and how appropriate it is to your financial situation. But what matters more is how you faithfully stick to it. At the end of the day, a budget is just that – a tool. And like all other tools, it is only as good as its user.
There are FIVE PIN-WORTHY GRAPHICS below. Feel free to PIN them on your BOARD for INSPIRATION! Simply hover over an image and the SAVE button will appear.