Does the word “budgeting” bring up negative thoughts in your mind? Or are you a bit unknowledgeable or intimidated at the thought of creating and living by a budget?
No judgment here. I used to feel the same way.
When I read about or thought about budgeting I’d get this knot in my stomach. I’d have visions of living on rice and beans for the rest of my life. Then I learned the real reasons why budgeting is so important.
Now my budget and I are BFFs. I love that thing and visit it several times a month. Why? Because there’s a few secrets to budgeting you may not know about that might help you to love living by one too, and I’m going to share them with you today.
What is Budgeting?
Let’s start by talking about what a budget is. Simply put, a budget is a plan for your money. That’s all! Just like you plan your day, scheduling the activities and tasks you need to do, you can plan your money as well.
And budgeting doesn’t have to be overwhelming. In fact, Well Kept Wallet has a great starter budget form that can help you create your first budget. Or, you can create your personalized budget on a simple Excel spreadsheet or even in a notebook like I do.
Tip: Make it even easier to pull your expenses into a spreadsheet automatically with Tiller! Try it free for 30-days!
There are several reasons why a budget is important, and dare I say; can even be fun! Let me tell you how a budget has changed my financial life and what living with a budget can offer you as well.
Budgeting Puts You in Control of Your Money
Okay, this is my absolute favorite part of budgeting – and no, I’m not a control freak. 😊 I used to view budgets as a path to losing control – control over what I could buy and when I could buy it.
But in fact, budgeting is the one tool that puts you in total control over your money. Here’s why.
When you create a budget, you get to decide how you will spend each and every dollar of your income. Have you heard the term “give each dollar a job”? Budgeting helps you assign each dollar of your income a job every single month.
You might assign $900 of your money toward rent and $300 of your money toward discretionary spending on entertainment – the choices about which jobs you assign each dollar of your income belong completely to you.
When I realized that creating a budget every month helped me be in control of my spending, my fear of budgeting started to dissipate. I liked the idea of being in control of where my money went.
Before budgeting it seemed to me that my money simply disappeared. I never had any money, but I didn’t understand why. When I wrote my income list and my bills list down on paper it seemed that I should have enough to go around, but I was always short at the end of the month.
It wasn’t until I started making a plan for my money each month that I could seal up that black hole of spending. It used to suck all of my extra funds into a disappearing funnel, never to be seen again.
Now I know where each dollar goes every month, and it goes where I tell it to.
Budgeting Identifies Overspending
Which brings me to my next point. Budgeting is a rockstar solution to overspending. When you budget, you get a clear view of how much money you have coming in each month, and you can therefore better determine how that money goes out each month.
Before I started budgeting I would simply spend as I saw fit. The biggest problem with this….ummm.. tactic… is that I was spending more than I made every month – and getting deeper in debt in the process.
And I couldn’t figure out why. I thought the problem was my income, but in reality, the problem was that I was overspending and didn’t know it.
When you create a budget that determines where each of your dollars go every month, you can discover and conquer any overspending patterns.
In my case a large part of my overspending was going toward drive thru runs and other eating out excursions. Mind you, these weren’t planned eating out excursions for the enjoyment of time with family and friends.
Instead, they were those little trips to the fast food drive through, the big box store snack bar, etc. They added up to big money over the course of each month, mostly because they almost all involved my four kids.
Once you start budgeting, you can do like I did and set specific dollar amounts to be allotted toward those types of expenditures each month. That way you are spending what you want to be spending in each area and not spending more than you want to be spending.
Budgeting Helps You Prioritize Your Spending
This brings up another great benefit of budgeting: budgeting is a great way to help you prioritize your spending. When I realized how many hundreds of dollars per month I was spending on snack bar trips and drive thru runs, I had to ask myself a question:
Is the amount of money I’m spending each month on this stuff worth the time it takes me to earn it?
The answer was a clear “no”, and that made me re-think those expenditures and cut way back on spending in that area.
Budgeting helped me to discover which expenditures were important to me, and which ones were not. This is a crucial step if you want to have your money work for you in a way that brings you peace and joy.
As you make your budget each month, just ask yourself one simple question: How important is this expense to me?
If it’s worth it, keep the expense. If it’s not, find a way to reduce or eliminate it so you can spend that money on something that has a bigger priority in your life. This is called value-based spending. Value-based spending helps you ensure you’re spending your money on the things that matter most to you.
And budgeting is a great way to help you implement a value-based spending program.
Budgeting Helps You Reach Your Financial Goals
What other added benefit will that value-based spending program bring to your life? Well, combined with your budget it will help you reach your financial goals.
Just a question: have you ever given some thought to what your financial goals are? If so, great!! You’ve probably already reaped the benefits of identifying your financial goals.
If not, you’re missing out, my friend. Benjamin Franklin once said:
“If you fail to plan, you are planning to fail.”
That quote speaks volumes to me, and it certainly rings true in the personal finance arena. In fact, writing down your goals is shown to increase your chances of meeting them exponentially – check out this article by Forbes for more info on that.
Once you’ve determined what your financial goals are – and written them down – you can use your budget to help you reach those goals.
For instance, let’s say you want to save $25,000 as a down payment on a house in the next five years. All you have to do to reach that goal is to create a budget. Make sure it allows you to put $417 a month into a savings account targeted toward your house down payment. Then continue to do so for the next 60 months. See how that works?
With each financial goal you have, you can do the same by just working those numbers into your monthly budget. This might require that you reduce spending in other areas, but that’s okay if you’re using a value-based spending program.
As an example, you might decide that the $120 a month you’re spending on a cable TV subscription is not as important to you as your goal to pay cash for a new-to-you car. So, you cancel your cable subscription. Then you use your budget to re-route that $120 a month to your new car savings fund, along with the other money you’re putting in.
This will help you to prioritize your spending and reach your financial goals faster.
Budgeting Gives You Peace of Mind
So many aspects of budgeting can be truly life changing. But, I have to say that one of my personal favorites is the incredible peace of mind that budgeting can bring.
Since I began budgeting over five years ago, the peace of mind I have is increasing every month. The more in control I am over my money (thanks to my budget) the closer I get to my financial goals and the more at peace I feel.
Before I started budgeting I worried about money constantly – on nearly a daily basis. Now that fear is largely gone thanks to the fact that I implement a solid plan every month for my money.
If you crave peace of mind about your finances, I strongly encourage you to start budgeting. I’m convinced that your budget will help you just as much as mine helps me.
A Word About Spend Tracking
I can’t talk about budgeting without talking about spend tracking. This sister to budgeting simply involves writing down each dollar you spend into specific categories; i.e. groceries, entertainment, transportation, housing, clothing, gifts, etc.
There are several online programs that can help you with spend tracking, such as Personal Capital, which is FREE. But, I just use an old-fashioned Excel spreadsheet.
What will spend tracking do for you? It gives you a clear, real-time picture of where all of your money is going. Plus, you can see how much you’ve spent during the month. The benefit to that is that you can make changes to your spending as soon as you realize you’re spending more in a given area than you wanted to.
For instance, let’s say you’ve budgeted $200 a month for entertainment expenses. If, by the 20th of the month you look at your spend tracking sheet and see that you’ve already spent $197 on entertainment, you know right now that you have exactly $3 left to spend. You’ll know you need to start planning some at-home fun or other free activities for the remaining days of the month.
This real-time assessment of your spending helps you keep your spending priorities in line and your financial goals on track.
Bonus: it gives you a rear-view assessment of how your spending changes over the years. I love looking back over the years and seeing what I’ve spent in each category for the year. And this hindsight view also helps me set my goals for the coming year.
There are just so many benefits to spend tracking that I can’t even count them all. I highly recommend you spend at least one month tracking all of your spending so you can see in real time where each dollar you earn goes.
In fact, budgeting combined with spend tracking has helped me cut my family’s grocery expenditures nearly in half: from $900 a month to under $500 a month – even with four kids!
If you want a more secure and financially stable existence, I highly recommend budgeting. It’s a way to take control over your money and start reaching your financial goals, no matter how outlandish those goals may seem.
Goals combined with a solid plan and committed action steps have a much higher chance of being achieved. Make your money plan today and create a budget for yourself. It will help you take those strides toward achieving every aspect of your money plan.
Whether you want a paid-for house, to buy your next car with cash, to get rid of your consumer debt once and for all or to achieve financial independence, a budget can help you get there.
Do you use a budget for managing your money? If so, what type of a system do you use and is it working for you? If not, what’s stopping you? Share in the comments below.