A budget acts like a matchmaker. It introduces this end (your expenses) to that end (your income) and makes those ends meet.
If one of your goals is to get, or keep, your finances in order, then the importance of budgeting can’t be overstated.
But that’s only the start of what it can do for you. There are other matches a budget can make, too. Let’s see how these seven sensible budgeting benefits hook up with your monetary wants and needs.
1. Budgeting Can Help You in an Emergency
Your roof caved in, thanks to that blizzard. Your regular paycheck suddenly disappeared, thanks to those hard-hearted corporate bean counters who ordered job cuts. Your kid broke his ankle, thanks to that fall out of the tree.
Yeah. Thanks a lot.
Unforeseen nasty expenses like those (and any number of others) can catch you off guard, but there is a way to predict them: add a line into your family budget that says “emergencies.”
You can pretty much count on them cropping up during times when you can least afford them. Coincidence? Fate? Just your dumb luck?
A budget that includes an emergency fund takes luck (or lack of it), fate, and coincidence out of the equation. With an emergency fund that can cover your living expenses for anywhere from three to six months, it won’t be so financially painful to re-roof the house, or to conduct a thorough search for your next job (the right one this time), or to get your tree-climbing youngster’s foot in a cast (though that’ll be painful for the poor kid even if it doesn’t hurt your wallet so much.)
Including an emergency fund in your budget doesn’t have to be a significant drain on your resources. It might take a little time to get it flush enough to last you for those six months when you really need it, but a budget will get you there by helping you commit a certain amount to your emergency fund every week, even if that amount is minimal.
2. Budgeting Can Help with Retirement
What do you hope to do in your retirement? Travel? Finally learn to dance? Babysit the grandkids? Do absolutely nothing? Live like Snoop Dogg in an Adirondack chair and a smoking jacket on the beach, popping the top on a Corona Extra? (Oh, wait. That’s his television commercial persona. Full disclosure: A certain writer probably watches too much tube.)
Do you want to be able to stop working even before you reach your golden years? How much monthly money will you need when you aren’t punching a time clock any longer?
If you already know the answers to those questions, great. You can build the precise savings you’ll need into the budget you’re creating right now.
Most people, though, don’t have those kinds of specifics in mind yet. They just know they’ll want to be saving enough for retirement. A budget can handle that, too. It’ll help you figure out how much you can afford to contribute on a regular basis to a 401k or an IRA at any stage of your financial life, and then it’ll help you keep making those contributions.
If you stick with it, those retirement funds will be there for you when the time comes to, as Snoop says in the commercial, “start living the fine life.”
3. Budgeting Can Help You Fix Bad Spending Habits
You might not want to admit that some of your spending habits aren’t helping your financial well-being. They’ve been with you so long that they’re part of the furniture of your life. Movies. Streaming services. Regular nights out. A kneejerk urge to have the best of the best of everything. You know, like a daily almondmilk chestnut toasted latteccino (yes, that’s a totally made-up drink) at the high-priced coffee shop on the corner. Not to mention the on-the-spot impulse purchases – headphones, sneakers, sweaters, sports jerseys, earrings and assorted tchotchkes – that your credit cards make so easy and convenient. All those hats, You had to have ‘em, right?
A budget will help you consider a different answer to that question. In many cases, the answer will be: No, you don’t have to have ‘em.
The first step in breaking any bad habit is recognizing the problem. When a budget asks you to detail and itemize the decisions you make about how to spend your money, those taken-for-granted expenses will come into focus.
Fixing your bad spending habits might seem hard. You’ll likely have to make some difficult choices. But your budget doesn’t have to be totally uncompromising. You might still be able to buy a new car, for example, but your budget might only give you room for a Kia rather than the Tesla you’ve been coveting. And budgeting might still allow you to frequent your favorite java shop … as long as you can order a simple delicious coffee rather than that pricy, exotic other thing.
» Learn More: Budgeting Tips for Beginners
4. Budgeting Gives You Control of Your Finances
Knowledge is power. You’ve heard that, right? Well, a budget keeps you in the ‘know’ about how much money you have, how much money you’re saving, and/or how much you might be over-extending your resources. In other words, budgeting puts you in charge of what you can afford and when you can afford it.
Maybe you’ve been having difficulty paying your credit card bills on time. Maybe the beach vacation you crave seems way out of reach. Maybe the holidays put an excessive strain on your already-stretched cash on hand. When you don’t control your own financial life, you can be powerless to stop spiraling deeper and deeper into a money-you-don’t-have hole. Getting out of debt can feel like an impossibility.
Saving money with a budget gives you the knowledge, and thus the authority, to change that. Knowing how much you’re spending and prioritizing what you’re spending it on, compared to the amount of money available to you, eventually will lead to financial independence. And that’s a powerful feeling.
» Learn More: Financial Planning Process
5. Budgeting Ensures You Only Spend What You Can Afford
We mentioned this earlier: A budget helps you decide whether you should buy something. Without a budget, those decisions can be driven by less financially sound factors like, say, the presence of a credit card burning a hole in your wallet or purse that will let you have that thing now, whether you can pay for it later or not.
In fact, credit card debt is the single biggest problem among people who are in money trouble, and it’s getting worse. The average credit card balance for Americans late in 2022 was approximately $6,000, according to Forbes. That’s about 15% more than it was in 2021, the largest year-over-year jump in more than two decades. Clearly, a lot of spending decisions these days aren’t based on affordability.
So, think of a budget as a sort of governor on your spending. It will regulate your decision-making in a way that steers your financial well-being in a positive direction. You’ll know how much you can afford to spend every month because your budget is showing you how much you’re making and how much you’re saving.
6. Budgeting Can Improve Family Life
It might take a while to convince the rest of the family that sticking to a budget will enhance their lives. We aren’t going to pretend that cutting back on the overspending is a quick and easy sell to kids who are accustomed to getting whatever they want at the mall whenever they want it. In the long term, though, a budget can help improve your domestic tranquility in a couple of important ways.
For openers, living within your means will be a stress reliever. Studies have shown that one of the main sources of clinical anxiety is debt. (We’ll explore that a little more in the next section.) It’s easy to see that reducing financial stress can mean a happier home life for everyone in the family. When your budget makes your debt go away, the arguments about money go away, too.
The second benefit of a budget to the well-being of a family is that it can help everyone understand the do’s and don’ts of dealing with money. It’s hard to overestimate the value of teaching your children good financial habits, even if it means using your own bad spending history (which brought on the need for a budget in the first place) as an instructive counterpoint.
» Learn More: Budgeting Tips for Young Adults
Bringing the whole family into the creation and implementation of a budget gives each member a sense of participation and even ownership of your collective financial health. Regular discussions about the budget can make for productive communication opportunities, and those are always good things in a family. Everyone could take part, for example, in organizing a weekly money-saving dinner menu schedule.
» Learn More: Budgeting for a Baby
7. Budgeting Can Reduce Financial Stress and Improve Mental Health
About that debt-related anxiety we touched on a moment ago … it can be particularly intense when someone in financial trouble is living paycheck to paycheck. If you don’t think your finances could survive an unexpected expense, it’s no wonder you might be losing sleep or experiencing panic attacks or outsized mood shifts.
Or worse.
Angst about finances can be related to physical problems, too. It can affect your blood pressure and your heart rate. It can impair your memory and cause weight gain. So again, reducing your financial stress can be a key benefit of a budget that brings you back from the depths of debt.
Your health, whether it’s mental or physical, and a budget? That’s a match well worth making.
How Do You Make a Budget?
Remember, a budget matches your expenses to your income so you can adjust your spending where necessary. Hate to break it to you, but that means math will be involved as you put one together. You’ll need to bring a few of your organizational skills to the task, too.
These basic steps should give you a good start on how to make a budget:
- Assemble your financial documents, including bank statements, credit card balances, investment accounts, paycheck stubs, etc.
- Calculate your monthly income.
- List your monthly expenses, including fixed costs such as rent or mortgage, car payments and insurance, health insurance, utility bills, and credit card payments. Do the best you can to include variable expenses such as dining, travel, and entertainment, too.
- Add up your expenses and your income in separate columns.
- Evaluate how those expenses and income match up.
Once you’re able to compare those two figures, you can start to sort through what needs to be done to bring them into the alignment you want. To make the budget do what you want it do for your finances, it’s important to identify the areas in the expenses column where you can cut spending.
It really isn’t as daunting as you might fear. In fact, there are some easy-access resources out there to lighten the load for you. It’s worth exploring some of the budget apps designed to help you through the process.
Of course, having a budget in place won’t do you much good unless you commit to following it. That’s where your willpower comes into play.
Here are some tips for making your budget work for you.
- Know the difference between luxuries and necessities.
- Be aware that the little stuff can add up fast. (Remember those high-falutin’ coffee drinks?)
- Restrain yourself. Willpower!
- Use cash rather than credit cards whenever you can.
Talk to a Professional About Reaching Your Financial Goals
Are you convinced yet about the importance of a budget? Hope so.
But if you need more information, more assurance that a budget will be an key step on your road to financial recovery and well-being, then by all means get in touch with a professional credit counselor. A counselor at a nonprofit credit counseling agency such as InCharge Debt Solutions can talk you through whatever budgeting questions and issues you have. He or she can even help you with personalized suggestions for cutting your expenses and maximizing your income.
If a debt management plan or debt consolidation might be an effective way to enhance the effectiveness of your budget, a credit counselor will discuss those options with you.
There is no charge for a session with a counselor from a nonprofit credit counseling agency. The sessions usually are done over the phone, but they can be offered in person or online as well.
No reason to wait a minute longer. Get started. Gather those documents. Make the call to a credit counselor. A budget can be a match made in money heaven.
