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There are so many reasons why having a budget and maintaining it should be on anyone’s to-do list in adult life. Not only is it important to know how much you have coming in and where you need to direct that money to, but understanding how much you have leftover to save or spend can be equally as important.
There are many different ways to set up your budget control. Whether you use a specialized application, Google Sheets budget template, or old-fashioned pen and paper, there’s no wrong way to track everything financially related to your life.
While you might know the “how” of the budgeting process, you may need to gain a bit of understanding of the “why.”
Here are six reasons why you need to budget and the benefits of doing so.
Let’s be honest: everyone has something they want but cannot purchase because it’s too expensive. Without any understanding of what it takes to get that thing, how are you supposed to reach it?
Well, setting a budget makes it clear what you need to accomplish to reach your goal. For example, if you want to purchase a new chair but are wary about what you have monetarily, a budget will show you what you have leftover each month after you factor in your income and your expenses.
After you find out how much money you have leftover, you can decide how much of it will go to a rainy-day fund, your 401K, your “fun money,” and so on. If that chair fits into the amount you have in your “fun money” account, you’ve reached your goal of buying the chair.
This can go towards a more important goal too, like purchasing a house. There are even specialized income sheets that specifically help with saving towards a goal like that. It’ll feel much better once you know you can afford a purchase while budgeting.
Credit card companies take the biggest hit once you learn a skill like this. So often, Americans spend money that they do not have. Nerdwallet reports that the average credit card debt per household reached $7,104 in 2019.
When you spend money that you don’t have, you end up owing more than you already spent. That shirt you bought for 50% off because it was on sale? Well, you’ll end up paying full price for it once interest gets added onto it. That’s not to say credit cards are a bad thing. As a matter of fact, with cashback rewards, it can be beneficial.
With a budgeting app or system, you can track what money you have to spend. And when you do that, there’s no interest to worry about.
The whole point behind the FIRE Movement – which stands for “Financial Independence Retire Early” – is to, well, retire early. Adding on to the last two points, you’ll be able to understand what money you have and don’t have and where it all goes with a budgeting system. As mentioned, you can dictate how much of your leftover budget will go towards a 401K or other kind of retirement fund.
The more you have in retirement funds, the easier and more likely it will be to retire early and comfortably. Having that ease is the recipe for a better and happier life.
Saving for a goal and retirement is out of the way. But, saving for emergencies is another aspect of budgeting that is integral in the case of something going wrong.
Picture this scenario: You are driving your car home in a thunderstorm, and hail drops down before smashing your windshield in. You may have insurance that pays for it all, but your premiums go up afterward. So, you may want to consider paying for this one out of pocket.
If you don’t have a budget that shows just how much you have in your emergency fund, you’ll be anxious about each expense going forward. Knowing that you have enough to spend on higher premiums or a costly repair, however, won’t sting nearly as much when you have your budget under control.
Notice that I said, “as much.” Of course, spending your extra cash will hurt a bit.
Another aspect of budgeting systems is that you can see how much money you make and where it flows out of your wallet. Instead of thinking to yourself that you’ve just been going to the local fast-food chain twice per week, you can realize that you are actually spending $60 per month on fast food. That’s a lot of money, and for people in entry-level jobs, that’s a full day’s work for meals made for a tenth of that.
This isn’t a stab at anyone, either. All of us get into situations where we end up paying much more than we intended for things. One purchase can spill into a few more purchases, and soon you’re filling up your entire “fun money” category on something you didn’t think was worth as much as you spent on it.
That’s a hard pill to swallow, especially when you are trying to save towards future goals and have expenses that can vary each month.
Without a budgeting system, it feels like you are always taking a risk whenever you pull out your credit card for another purchase or expense. Without exactly understanding where everything in your wallet is going, that’s a feeling that permeates throughout your entire life. That money is controlling your emotions and actions, literally.
Wrangle it. Make sure you control your money by keeping track of it and truly understanding what the effects of your financial situation and spending habits are. Once you do that, you can see what you actually can spend and what you could cut back on.
Is your internet or cable costing you too much? Are you spending an astronomical amount on subscriptions or take-out? See if you can go to a cheaper plan, eliminate the expenses, or take advantage of ways to get things for no cost, like free internet. There are so many positive things that come out of budgeting that it makes it a no-brainer.
Budgeting is not that hard to do. It can seem like a daunting task in the beginning, but getting into a rhythm of tracking what you spend along with what you earn will make a world of difference. It’ll obviously affect your financial progress. But, it’ll also make an impact on your social life, emotional wellbeing, confidence, and more.
After all, knowledge is power, and the more knowledge about your money that you have, the better.
About the Author: John Hawrylack
John is the co-founder of How To FIRE, a blog that discusses financial independence and early retirement. He has a BS in Computer Science and is working towards a Masters in Software Engineering. Along with his wife Sam, their goal is to help others discover their own version of FIRE through saving money, making money, and money management. Their blog has been featured in publications like Forbes, Debt.com, Yahoo Finance, GoBankingRates, MSN Money, and more. Get in touch with John on Twitter @HowToFIRE.