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Budgeting is the single most powerful tool for managing your money, because it enables you to funnel your money in accordance with your values.
Listening to the benefits of budgeting might have made my eyes glaze over in high school. But ironically, the advantages of budgeting bring exactly what someone any age wants – time and freedom.
Contrary to popular belief, budgeting isn’t an exercise to limit your life. Using a budget has benefits way beyond just paying this month’s bills.
Making a list of your income and expenses isn’t hard. What’s harder, is accepting that the numbers will force you to make some decisions. Even a simple budget will make it clear that you can’t do everything, but you can do some things.
So a budget will help you to start zeroing in on what you value most.
What is it you want to focus on over the next couple years?
- To live more lean so you can afford to travel?
- Save for a new home, or make some improvements to yours?
- Pay off student loans or credit card debt?
- Ramp up your retirement savings?
- Pay for education that’ll enable you to transition to another career?
A budget helps you to think longer term instead of focusing only on paying the bills.
2. Budgets make everyday decisions easier
There’s always gonna be something we “need”. A new pair of shoes to go with that outfit, a new phone, or an maybe an HBO subscription.
If you’ve been using a budget, you probably know right away whether you have the cash for those shoes. But if you’re just winging it without a budget – paying the bills each month and hoping there’s money left over, you may not be sure if you can afford them.
Have you ever been on the fence about a purchase, decided to go for it anyway and then found yourself short the next week?
Using a budget makes you more aware of your cash flow each week.
3. Budgeting helps you to live within your means
Let’s go back to that tempting pair of shoes. You’re not using a budget, so you’re not sure if you should spring for them this month. But you really want them, and you happen to have a credit card in your wallet.
Wouldn’t it be easy to just charge them? After all, it’s only what, twenty dollars a month?
Maybe so, but that’s an easy habit to fall into. An $80 pair of shoes, a $60 pair of pants, a few dinners here and there… and suddenly you owe $2000 at 29% interest for a laundry list of things you may not even remember.
When credit card debt starts taking a bigger chunk of your take-home pay, the first thing to sacrifice is probably savings. – like a regular deposit into an emergency fund. So when the car needs a repair, it too goes onto a credit card, prolonging your paycheck to paycheck cycle.
Using a budget eliminates the excuse of, “Well I’m not sure whether I can afford this, so maybe I should charge it.”
4. Using a budget helps you shift from a life of bill paying, to accumulating wealth
If you’re not using a budget, there’s a pretty good chance you’re living paycheck to paycheck regardless of your income. In fact, a study by Career Builder says 78% of Americans depend on their next paycheck to survive each month.
Can you believe it? Seventy-eight percent!
The stress of paycheck to paycheck life is enough to deal with. But what’s worse, is that for all the months or years you’re living on the edge, you’re not able to take advantage of what Albert Einstein called the eighth wonder of the word – compound interest.
The biggest factor in accumulating enough wealth to either retire or achieve freedom isn’t the amount of money you put away. It’s taking advantage of consistency and time.
The example I like is from Burton Malkiel, author of A Random Walk Down Wall Street. He talked about two men who each saved $300 per month. The only difference is when they started.
- William started saving at age 20, and quit at age 40. He never saved another dime until his retirement at age 65.
- James saved the same $300 a month, but he waited until age 40 to start. He saved every month until he was 65 – five more years than William.
They both averaged a 10% interest rate.
William, who started saving at 20 and quit at age 40, retired with 2.5 million dollars, even without saving a penny for the last 25 years of his career.
James, who waited until age 40 to start, saved $400,000 by age 65.
So how did this affect their quality of life in retirement?
Using the 4% rule, which says you can afford to withdraw 4% of your nest egg each year without exhausting the principle:
- William, who saved from age 20 until 40 could safely withdraw… $100,000 per year.
- James, who saved from age 40 until 65 could safely withdraw…. $16,000 per year.
That’s the difference that living paycheck to paycheck for two decades can make.
5. Budgeting reduces friction in a relationship
According to Marriage.com, friction over money is one of the biggest causes of breakups. Even if you take the time and get to know each other’s attitudes toward spending and debt, things can change.
You change jobs, salaries adjust, expenses fluctuate, or maybe you have children. Your circle of friends can change over time, and it’s human nature to want to keep up with the Jones’s.
Even if one person handles bill paying, a once weekly budget review can head off lots of misunderstandings. It gives you a chance to discuss upcoming expenses, strategize together, and even celebrate your progress.
The benefits of a weekly budget talk will help you to stay on the same page with longer-term goals, which in turn make it easier to see eye to eye on short-term spending habits.
6. Budgeting enables you to handle emergencies
The inability to pay for emergencies with cash is one of the biggest traps that keep most of us living paycheck to paycheck.
Your budget should work as long as your checking account is used for predictable expenses – things you expect to pay every month. Some regular expenses like food or utilities vary a bit from month to month, but you can expect to budget for them pretty closely.
One of the first categories you’ll want to create in your budget is an emergency fund. Automating a regular deposit into your emergency fund every pay period, is a critical step that’ll help your budget work and pay for your next emergency.
Can you imagine never again needing to pay for a car repair with grocery money?
But here’s the key: Your emergency fund needs to be a separate account from your checking account. An account you’ll only access for unexpected emergencies.
A budget with a category to automatically and regularly, drip money into an emergency account is a simple, but powerful step.
Paying for emergencies with cash, helps your budget to be predictable, and helps to eliminate debt.
7. A budget gives you the answers
When you’re living paycheck to paycheck, it’s hard to know why you can’t seem to get ahead. You pay the bills every month, and maybe you even have a great credit score.
But there’s more to life than paying bills. And what’s the use of having an 800 credit score if you can’t afford to do anything?
What specifically is holding you back? Is it food costs, too much rent, too many dinners out?
The advantage of using a budget, is that it’ll show you exactly what the issue is. You’ll see an apples to apples comparison of what you’re spending month to month – and for the year, in every category.
Finally using a budget provided us benefits that helped almost immediately.
- I saw that our food costs were over $900 each month for three people.
- This is embarrassing, but I also found we were spending over $2000 a year on cable TV!
- And a budget showed that our lifestyle was keeping us in debt, living paycheck to paycheck. Our habit of going out to lunches and dinners every weekend cost several hundred dollars each month.
Finding these money leaks was a direct benefit of using a budget. They were easy to fix. And at a time when I thought we couldn’t afford an emergency fund, suddenly we could.
It may not be pleasant discovering your money leaks, but a simple budget will give you the answers you need.
8. One of the most important benefits of budgeting - you’ll have less regrets in life
One of the most important benefits of budgeting, is that it creates choice in your life. Rather than feeling stuck in your job, your apartment or even your relationship, budgeting your money gives you the power to choose.
Budgeting will help you to eliminate endless debt payments, and counting the days until your next paycheck.
Dave Ramsey says, “a goal without a plan is just a dream”. Whatever your dream is, a budget is a tool that’ll help you to make it happen.
According to Bronnie Ware, author of Top 5 Regrets of the Dying, the number one regret of people nearing the end of life, is that they never lived the life they wanted to. They spent years living a life they wouldn’t have chosen, and never had the wherewithal to choose another path.
So is budgeting really restrictive?
Only in the sense that it restricts your ability to be complacent.
In exchange for 20-30 minutes a week, a budget will help you to spend your money intentionally, in a way that aligns with your goals.
What are a few things you could you set your sights on now, that would enable you to have less regrets later in life?
- Are there places you want to travel to?
- Somewhere you’d like to move?
- A subject you’d like to learn more about and possibly work in?
A budget is like that friend who tells you the truth even when it may hurt a bit. But you treasure them nonetheless because they help you to grow.
How about you? Is there a budgeting app you use now, or would like to try?
Here are ten different budgeting options. Some apps, some spreadsheets, and some simple templates you can use to hand write your expenses.