What Are The Main Budgeting Methods?
Love it or hate it, if you want to achieve financial security, you need a plan. A budget is quite...
It doesn’t matter if you’re living pay-check to pay-check or earning a six-figure salary. If you want financial security, you'll need to understand and control where your money is going. You will need to make a budget.
I'm going to take a leap of faith here and guess that you've heard of budgeting.
But unlike what you might have heard, budgeting isn’t about restricting yourself. On the contrary, making a budget actually gives you the freedom to spend money on the things you love.
Do you know why that is? Because a budget is quite simply a plan for how you will use your money both now and in the future. It takes into account current and future income and expenses.
It really is that simple.
Love it or hate it, if you want to achieve financial security, you need a plan. Budgeting is essentially planning for your money. This should be reason enough to get on the budget bandwagon, but if you need even more, here are seven good reasons why you need a budget.
Key Benefits Of Using A Monthly Budget
1. Align your spending with your financial goals
Whether we outright spell them out or not, we all have financial goals. Want to take that trip to Hawaii? Maybe you want to save up enough to put a down payment for your dream house. Using a budget, you can better define your goals and timelines by referencing actual numbers to plan out how much you will save toward your goal.
A budget forces you to really think about some long-term goals, and helps keep you accountable.
You know why that is? Because numbers don't lie! Without clearly defined financial goals, your timelines will change and that vacation you were to take in the summer of this year will be your winter getaway and so on and so forth.
OK, so you might not want to pass on that 3rd happy hour for the week that you know will cost you another $50. But when you remind yourself that you're saving up for that vacation in the summer, it will be much easier to ask your friends to join you for some drinks at home.
Related: How to set SMART financial goals
2. Avoid Spending Money You Don't Have
4,000 to 10,000 advertisements. That's the number that digital experts estimate most Americans are exposed to - per day in 2015!
Such unrelenting commercial bombardment is exerting a powerful effect - one that convinces us that consumption is the key to a meaningful life.
At a staggering $5313, the average person's credit card debt paints a clear picture. We are spending money that we simply do not have. Budgeting can help stop this habit at its tracks and help you pursue a better relationship with money.
3. Save Toward Retirement
As of 2020, only 27% of American retirees were very confident about being able to live comfortably upon retirement. Yup, you read that right. Makes you wonder about the other 73% - such a sad reality.
Budgeting can help us cultivate a culture for saving towards our futures. Compared to the 1950s, Americans today live on average 20 more years after retiring which calls for well-designed retirement plans. Intimidating as this might seem, this isn't a time to get paralyzed thinking about the future - it is a time to plan for it, and a budget is step number ( you guessed it )... one!
After all, would you rather spend your retirement golfing and taking trips to the beach or working as a cashier at the local bookstore? Food for thought.
4. Payoff your debt faster
If you have a debt, you're not alone. The average debt balance in the U.S. in 2020 was a whopping $92,727!
Simply put, debt can be a major liability for your finances. If you are in debt, a budget can help you plan a debt payoff strategy, without which you might find yourself in constant financial struggle.
A budget can also help you truly understand how much you are putting towards paying off your debt. With debt fragmented between student loans, auto loans, mortgages etc, it might be difficult to truly keep track of what you're paying.
5. Less financial stress
Let's face it, money intersects with almost every aspect of our lives. It is vital that we have a good relationship with it. But that is not always the case. Money has probably kept most of us up at night a few - or not so few - times.
Budgeting gives you more control of your money to help keep financial stress at bay. We all know the implications better financial control can be huge, but I will just mention one - better sleep! Need I say more?
6. Prepare for Emergencies
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Get this: According to a survey by Bankrate in 2020, nearly 4 in 10 Americans would not be able to cover a $1000 emergency!
And you'd be wrong to think that financial emergencies are uncommon. Within the last year alone, 28% of Americans experienced a financial emergency.
Crazy, right? I know!
This is why personal finance experts, who disagree on almost everything else, almost all get behind having an emergency fund. And for good reason. Having an emergency fund is the backbone of any financial plan.
A budget can help you build your emergency fund. It can be especially crucial to have a financial buffer if you are already in debt to avoid relying on high-cost solutions such as credit cards. With the average credit card interest currently at 16.12%, you probably (definitely? ), want to avoid being in a position of having to borrow during an emergency.
7. Identify (and get rid of) poor spending habits
'I just don't know where it all went!'.
Sound familiar? We've all been there when it comes to money. But a budget can help turn this around.
A budget forces you to take a close look at your spending habits. Soon enough, you will be noticing patterns that you might not have even been aware of, and, hopefully, cut on things you don't need.
Do you honestly need 20 watches? What about that new car - perhaps a used car might work just as fine? Budgeting allows you to identify and rethink your spending habits and re-focus your financial goals.
Final Thoughts
Of course, these are just the tip of the iceberg. There are many other reasons why budgeting is important. There is no doubt that it's one of the most important ways in which you can improve your financial future, reach your financial goals and achieve financial freedom.
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