Five Reasons You Should Budget
Let’s be honest, budgeting isn’t fun. However, it’s an important part of personal finance for a variety of reasons. I’ll discuss five of them below in hopes that it will change your mind about budgeting if you don’t do it now. If you do budget and you do it for a reason I haven’t listed, I invite you to share it in the comments!
What You Measure, You Can Improve
The classic struggle with money is always to spend less than you earn. If you spend more than you earn, you run the risk of burning through your savings and taking on debt. Once you start budgeting, you’ll have a better idea of how much you’re spending and know how much “wiggle room” you have in your monthly spending. Are you $100 away from going underwater? Or $500? Or $1000? By measuring, you know for sure.
Helps In Decision Making
By knowing how much you spend on each category, you can make decisions about your spending. Having numbers gives you the information you need to decide whether you are spending too much in one category or spending too little. By writing down each purchase or each expense, you start making active decisions, rather than going along with what you did last month.
Along with the decision making is the ability to improve how you spend your money. If you’re spending too much in one category, not you know for certain and can take steps to curtail the excess spending. The more data you have, the better informed your decision making will be.
Budget In Savings
If you don’t budget, chances are your savings strategy is to “save whatever is left at the end of the month.” That’s a bad way to save towards your goals because it’s unpredictable, especially if you’re not budgeting. It’s better to establish an amount and include it in your monthly budget, that way you can be sure to hit your savings targets. Here are some tips on how to budget in savings.
If you earmark a specific dollar amount and adjust your budget accordingly, you ensure that every money you are planning on saving that amount. Maybe something happens and you can’t save what you planned, but at least now you know why. More often than not, you’ll save that earmarked amount because you planned for it… which gets to your next reason.
It Helps You Plan
I touched on this in the “budget in savings” reason but the broader reason is that having a budget helps you plan for the future. Once you save up an emergency fund, you start saving for a house or a car, maybe you pay down some debt, or maybe you save towards starting a family. You will reach these goals faster if you manage your finances closely and actively contribute to your savings. We all know we want to achieve certain milestones in our lives, now it’s a matter of putting in a system that gets us there.
Keeps You Honest
When you have to document every purchase, it keeps you honest. It plugs up the leaks in your budget where money slips out because you weren’t keeping too close tabs on it. Do you spend a dollar each day on coffee? Or five? Do you just pull cash out of your wallet or purse without any accounting for that money? It’s so easy to take $50 out of the ATM and just spend it. There’s no accountability, you can spend it on anything and you wouldn’t be the wiser come the end of the month. By keeping a budget, you account for each dollar you spend and that’s a powerful incentive to stay honest.
Avoid Debt, Help Your Credit
Here’s a bonus reason that I don’t think most people keep in mind – by budgeting, you avoid debt. By budgeting, you avoid spending more than you earn and you avoid the downward spiral of credit card debt. I always advocate avoiding credit card use if you can’t pay it off at the end of the billing cycle and if you spend less than you earn, it’s possible. This will help ensure you have a good credit and credit score (wonder what is a good credit score?) so that you can get low interest loans on the things you may want to buy in the future, such as a car or a house.
There you have it, five (plus a bonus) reasons why budgeting is an important part of your personal finances. If you don’t budget, or did at one time but stopped, take the time to set something up today. Mint.com is a free money management tool, and it auto-categorizes all of your transactions so you’ll always know where your money goes.