- Gain control over your money
- Plan and save for retirement
- Keeps you focused on financial goals
- Prevents unnecessary debt
Budgeting creates a spending plan for your money and can help ensure there is always enough money to pay for food, bills, and other expenses. Having a budget is a good tool to avoid credit card debt and promotes saving.
Credit card spending can make it difficult to understand how much you are spending and could cause you to come up short when the credit card bill is due. Making a budget and strictly following the plan will keep you on track and allow you to fully understand where your money is being spent. Spending on credit cards can easily allow for purchases that are not necessary and that could derail your planning.
Part of your budget should be allocated to saving for retirement and extinguishing debt. Typically, debt is more important to pay off since it will free money in your budget that can be allocated elsewhere like saving. Set your saving goal realistically and celebrate milestones along the way to encourage commitment.
Creating an emergency fund is important and this should equal three to six months expenses. When we plan for emergencies, they do not become financially devastating. The car or home needing repairs, unexpected illness or injury, or loss of income should not be a surprise. These things will likely happen to everyone at some point in life and making a habit of maintaining a sufficient emergency fund will prevent these “surprises” from derailing your plan.
Budgets can be a valuable exercise to entertain with your spouse or partner. The process can make sure you are both on the same page regarding spending and saving. This process can also uncover bad spending habits. Do you really need the full cable TV package? Are you paying for multiple gym memberships? Could you save money by refinancing a mortgage? Answering these types of questions gives you control over your spending and you may be surprised to find out how much you are spending unnecessarily each month.
There are many approaches to budgeting. One common approach is the 50/30/20 Budget. 50% of your after-tax income should be allocated to needs. This include mortgage/rent payment, all bills, food, healthcare, etc. 30% is allocated for wants. Everyone should be allowed some discretionary spending. Being too strict could cause one to abandon the budgeting plan and derail your efforts. 20% is allocated to paying off debt and saving. This is where you will start to build your emergency fund.
Budgeting can sound like a chore, but you may be surprised how powerful controlling your money will feel and how much stress is removed from your life.