Budgeting, budgeting, budgeting.
You hear it everywhere you hear any personal finance advice, whether that be from your parents, your pastor, your uncle, or any random personal finance blog you come across on the Googles.
Clearly, budgeting seems to be the go-to advice on managing your finances everyone seems to be giving. Myself included. The biggest debt-payoff guru Dave Ramsey himself seems to preach about keeping a budget like pastors preach reading the Bible.
Everyone seems to take for granted that budgeting is important for your personal finances. But have you ever wondered why?
Here’s the short answer: Budgeting allows you to maximize the value of every last dollar you earn rather than letting your money get spent wherever and whenever at the slightest whim.
What is a budget and what it is not
A lot of people think a budget means stop spending money. That’s the wrong way to think about your budget. Some think that line of thinking can actually lead to an increased desire to spend money, which could be why budgets often don’t work. When you “can’t” have something, that makes it much more desirable. Kind of like dieting.
If you actually take a look at the numbers, you’ll find that about two-thirds of Americans don’t keep a budget (or at least don’t know how much they spent last month). Maybe that misconception contributes to the low participation rates next to just plain laziness.
I like to think about a budget in Dave Ramsey’s terms: a plan for how you’re going to spend your money.
This line of thinking is much more active. You’re choosing to do something with your money rather than fighting yourself to stop spending your money.
A budget is basically a tool that helps you to spend more money on the things you value most and less money on the things you don’t by tracking your income and expenses. It’s your roadmap to living (and sustaining) the lifestyle you want to live and getting the most value out of your money.
Now that we have a foundation for what a budget is, let’s look at why it’s important.
1. It Keeps Your Eye on the prize
When you’re sticking to a budget, you’re setting a definitive target to prioritize how you manage your finances. It helps you stay on track to meeting your long term financial goals, whether that be paying off debt, saving for a nice vacation, or retiring at 40.
Without a budget, it’s going to be an uphill battle to reach any goals when there are so many other more tempting things to spend on at any moment. Especially when you see a nice, juicy stack of cash sitting in your bank account just waiting to be spent.
“The trouble with not having a goal is that you can spend your life running up and down the field and never score.”- Bill Copeland
If you’re unsure what should be your top priorities, here’s my list below (adapted from Dave Ramsey’s baby steps) roughly in order of recommended priority:
- Build an emergency fund
- Pay off debt
- Invest in your retirement
- Save for your kid’s college
- Save for a down payment on a house
- Save for a nice trip, new car, or a wedding
2. It Keeps Your lifestyle in check
The key to financial success is living below your means. In other words, spend less than what you make. It just comes down to simple math: savings = income – expenses.
Having a budget enables you to keep track of your income and expenses. Therefore, you can calculate your savings. Without both of those crucial pieces of info, you will never know if you’re actually living below your means or just think you are.
It tells you what your expenses are, effectively setting the baseline for what your lifestyle should look like with the budget you’ve set. Your budget points out any deviations from your optimal lifestyle so that you can make adjustments as needed. Just like every successful company, storing, analyzing, and acting on data is a key ingredient to solving problems and making improvements.
Without a budget, it’s like ignoring the fire alarm or NASA ignoring engineers raising safety concerns on the challenger space shuttle. If there’s bad news waiting for you, you really need to hear it.
If fear is the main reason stopping you from putting together a budget, you need to be brave, and take the first step towards getting your finances under control. Willful ignorance is not going to make your money problems go away. Positive change takes active, intentional, hard work to make happen.
3. It helps you prepare for emergencies
Your budget (along with an emergency fund) also leaves in a little wiggle room for financial emergencies or unexpected expenses. If you set up your budget properly, you should leave in a little extra buffer for “miscellaneous” expenses that always seem to pop up every month, no matter how confident you are that you have no other bills to take care of for the month.
In my budget for example, I’ve had a “miscellaneous” expense 4 out of the 9 months I’ve been using my budget. These aren’t little onesies twosies either. One month, I had to drop $1.5k on these expenses and I’m definitely seeing more expenses come in in the near future.
I have a feeling that’s something that’s easy to neglect to fit into a mental expense plan without a proper budget. Without a little wiggle room in your budget for “miscellaneous” expenses, you’re going to be one emergency away from getting into serious debt.
If I had to guess, that’s probably why people end up getting into credit card debt (aside from getting hit with a massive medical bill). Perhaps mentally they’ve planned out enough to cover their recurring bills like rent, utilities, and groceries with their paycheck to paycheck lifestyle. But get pushed into the deep end when an unexpected “miscellaneous” expense sneaks up on them like a cheap jumpscare in a bad horror movie. I have a hard time imagining the majority of people with credit card debt consciously choose to start carrying a balance to pay for a new flat screen TV.
4. It gives you Peace of Mind
Another huge plus that comes with keeping a budget is peace of mind. Your budget alleviates you from the mental burden of worrying about if you’re doing ok financially. Even if you’re practically drowning in debt, sticking to a budget will help keep you sane knowing you’re following a strategic plan to get out of debt without constantly questioning every move you make.
Even if you’re not in debt, it’s also nice to “have permission” to spend money on whatever you want as long as it’s in the budget. You won’t have to ask yourself “Can I afford this?” every time you want to buy something. Your budget will just give you a clear, direct yes or no to that question.
A budget is also going to keep your finances organized. It’s going to help out a lot when it comes to decluttering your financial life and give you a clear picture of your income and expenses. It’s also going to minimize the number of calculations you would need to do to see if you have enough money in your bank account to keep the lights on.
5. It gives you full control of your money
A budget allows you to get total control of your money instead of letting money control you. I think that’s one of Dave Ramsey’s catch phrases. For good reason too. The average person over-spends by $7,500 each year or about $20 per day.
When you have a budget, you are effectively giving your money a job to do instead of letting it drift aimlessly to wherever is most convenient at the moment or whatever gives you instant gratification. Sure it might sound like just a few bucks to get a takeout meal here, buy some snacks there, and get a great deal on wireless earphones, but if you actually add those up, your jaw is going to drop the first time you make your first budget.
Budgeting means you are letting your cool, calm, rational mind take the wheel on your financial road trip rather than letting your monkey brain call the shots whenever you’ve just had a bad day, used up all your willpower for the day, or simply don’t have time to make a smart decision.
“A budget is telling your money where to go, instead of wondering where it went.” -John Maxwell
Long story short, budgeting is important because it puts you in the driver’s seat on your finances and allows you to direct your finances to where they matter most and away from the things that matter least.
Budgeting is the staple personal finance advice for a reason. It’s super important if you want to set yourself up to meet financial goals.
If you don’t have a budget right now, but are looking to start one, you can check out my budgeting excel sheet. If you’re more interested in getting your finances together in general, you can subscribe below to get my financial roadmap to get everything you need to sort out your finances.
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