“ Tired of being broke? Do you finally want to take control of your finances, cut discretionary spending, reduce debt and save money but not sure how to start. Learn why budgeting is an important first step to help you get started .”
Key Takeaways:
Learn why you should budget.
Understanding the benefits of budgeting.
The key to success starts with you but keep it simple.
By: Allan R Kirby
Why budget?
Basically, budgeting is a way to manage your household finances by tracking your income and expenditures. It helps you get an idea of your financial situation and provides you a way to plan for things such as vacations, buying a home, and even retirement. Although budgeting is critical in helping you manage your money, it's not a focus in most education systems. As a result, most people never really learn how to build a monthly budget and plan for the future. Because of this millions of people either do not know how to budget or struggle when they do try to manage their finance. This is unfortunate however take solace in knowing that there are many organizations such as mysmallbank.com that are here to help you learn more about how to manage your money. This article focuses on the importance of budgeting. As shown below you will get a much better understanding as to why you should budget.
#1 You learn to better manage your spending
This is critically important when budgeting, getting control over your spending. When you start learning to budget you begin to take a serious look at your spending habits. This is great news because you will likely end up reducing your spending which will lead to less debt if you're always using a credit card and carrying a balance.
I normally advocate for people who are having financial issues to first figure out how to control spending before moving to paydown debt and build wealth. Without spending control you will never be able to manage your money and properly budget. You could actually save a few hundred a month depending on how much you are spending on going out, shopping, subscriptions and entertainment. However, taking your time and keeping a few small luxuries never hurts. If you love buying that cup of Java every morning, go for it, the point is buying in moderation is the key to success.
“Budgeting 101: Spend less! such as cutting discretionary costs to help build your retirement.”
#2 Allows you to focus on what you really need.
This can be difficult for many to understand but when you start to budget you are finally forced to look at everything you are doing. Basically you learn how you want to live your life within a set budget. Taking inventory of your finances takes time but you will learn through budgeting where you are at and where you want to go. You are now thinking of your future as well as the present. You may find for example that what you really need is a more economical car, maybe rideshare or walk to work. In fact, you may even find that a studio apartment is what you really need and not a big two bedroom condo.
I did this when I was younger, I had to just sit down and figure out how I wanted to live my life, what is important, and what was not. This led me to actually start taking the bus to work instead of driving, I saved hundreds over the course of a year and I realized and I found the bus rid was not that bad. Sure I could drive but the savings was just too great and I was able to get my debt paid off. But taking inventory of where I am and where I wanted to go through my budget allowed me to adjust my habits.
#3 Keeps you out of debt
What you will find with budgeting is that by managing your spending and focusing on what you really need, will by default help keep you out of debt. Having less debt, especially high credit card debt will keep more cash in your pocket because you're servicing smaller high-interest debt. As we know servicing high interest debts will eat into your finances and make it difficult for you to manage your money. So if you are starting to learn how to budget but still have a lot of debt, it could be a good idea to cut those high interest credit cards and consolidate your debt. I have found that most people are less stressed when they are able to get control of their debts.
“Frugal Living: Consolidate your high interest debts and become frugal.”
#4 Allows you to save, invest and build wealth
Saving and investing is critically important to building wealth and securing your future and a budget will help you with this. First, as you gain control of your spending and cut debt you will begin to see that you will have money left over after expenses. You can use your budget to allocate some of that money into a savings account for emergencies. You can also use some of the extra money for other things such as a down payment for a house, a new car or even a trip. The point is a budget will help you determine where to allocate your extra money. I only suggest keeping some money just in case you need it for an emergency, it never hurts to have some money available. Suggestion: Have about $1000 to $15000 in emergency funds before you start saving for other things or even before investing.
Investing
As I just mentioned keep some cash available, never sell yourself short when you budget. It's never a good idea to take all of your cash and invest it. You may end up selling your investments at the worst possible time. However, over time you will start to see the benefits of budgeting as you take your extra money and start investing.
The types of investing you can do include stocks, bonds, CD's or alternative investments such as buying real estate. I have always suggested inexpensive Exchange Traded Funds (ETF’s) that are low cost and mimic the S&P 500, I never suggest high risk or questionable investments. Always seek help from a financial advisor from a reputable bank, investment firm or credit union if you are not sure what to do. You can even try fintechs such as Robinhood to buy and sell etfs and even stocks such as Apple, Amazon, Google etc…, my only suggestion is to be a little careful when doing direct buying, you still need to understand how stock markets work. The point I am trying to make is budgeting will help you build your savings and allow you to invest your money to help you build wealth over time.
#5 Allows you to plan for retirement
This is sometimes forgotten in the budget process, making sure you keep on top of your retirement Plans. The Benefits of starting early are well known The more you invest and the earlier you start means your retirement savings will have that much more time to grow. You could end up retiring early and potential to grow. With a budget, you will begin to see your current situation and see where you really want to be in the future. You need to plan early because the quicker you can get on top of your retirement plans the better you will be later in life. Most younger workers do not think much about retirement but most people who chose to ignore budgeting and planning for retirement will regret it later in life. This is all too often the case with many older Americans. Budgeting is key to ensuring you start a serious plan to save enough money for retirement.
“Why you should start budgeting early: It allows you to start looking seriously at retirement planning."
#6 Allows you to keep focused on your job.
This is something that is not discussed often about budgeting but one that I have personally seen over the years. People who have financial problems and do not budget will have difficulty keeping focused on their jobs. It can affect your career over the long term and you may even get skipped over for promotion. What I have found is that people who are stressed financially bring this stress to work and can end up performing poorly. This is especially true when workers are just trying to get by until the next paycheck, it can impact work significantly. Budgeting helps you gain control of your finances which will significantly reduce stress and allow you to focus on your job and career.
“It’s the simple truth financial issues can cause a lack of sleep, stress, and an inability to focus on your duties which will affect your career. ”
#7 Allows you to do the things you love.
This is the best part of budgeting, controlling expenses, and keeping debt low means you can save money to do things that you want to do. This could be anything you desire such as going on a vacation, buying a car, doing an exciting activity or hobby. By planning carefully you can save the money and buy without having to go into debt. When I finally got control of my money I found I was able to fully pay my vacation in advance, I did not have any remorse or quilt. But while on vacation I always kept my discretionary spending within budget so I would return debt-free.
What is the most difficult part of budgeting?
As I always say, it's up to you to make the hard decisions to get your finances in order by budgeting. The most difficult part of budgeting is getting started. It does take time and you do need to make adjustments. For some people it is not easy but for others like myself, you end up learning to love budgeting. Plus consequences of not budgeting could mean a life of living paycheck to paycheck, and we all know that there is already a shocking number of Americans just getting by paycheck to paycheck. But to help you understand a little more here are some of the benefits I found when I started budgeting.
The benefits I found from Budgeting
1. I found that I became less stressed at home and at work by taking control of my finances through budgeting.
2 Budgeting allowed me to become almost debt-free and I got rid of my high-interest credit cards.
3. I was able to save money and build wealth through stocks and index funds.
4. I was able to build a great retirement fund and I can now retire 5 years earlier than I originally planned. This was an unexpected benefit to budgeting that I never thought would be achievable when I first started.
5. I now plan and save for vacations, always keeping myself within my budget, even while on vacation.
“What is a good reason to budget? It helps you Save money, build wealth, keep you out of debt and plan for retirement while doing the things you love. ”
I have been told that budgeting sucks on many occasions, but over time I learned to love it. Today I can say there is no question that the benefits are worth the effort. I think you will find over time the importance of budgeting as well. So give it a try, try either a weekly or monthly budget, do not get overly complicated, you do not need to buy software or do anything super complicated. Creating a budget with a Personal Budget Spreadsheet, or buying a simple budget planner on Amazon.com even just a pen and paper, it's all you need to get started. Good luck!
Budget Planner is a segment of the MySmallBank.com blog written by Allan R Kirby, who writes and produces Personal Finance articles and videos along with My Success Magazine.