Whether you earn $24,000 or $95,000 a year, budgeting is crucial if you want to achieve your goals and gain long-term financial independence.
If you’re included in the 40% of Americans who have less than $300 in savings, read on to find out why is budgeting important and discover the latest budgeting tips.
Why is budgeting important?
So, why is budgeting important to meet your savings goals? From keeping out of debt to achieving your financial goals, we discuss the benefits of starting a budget.
The following budgeting tips will get you on track to spending more intelligently and saving more.
Budgeting stops you from spending money you don’t have
A budget is the most important tool for keeping your personal finances in check.
When you budget, it’s much harder to spend money that you don’t have.
Too many people spend money on credit cards, which leads to debt and paying back more than you originally borrowed through interest rates.
In fact, the average credit card debt per household reached $7,027 in 2020.
A strict budget management plan will allow you to see exactly how much money you earn, how much you need to use for outgoings, and how much you can afford to save.
Without budgeting, you are completely unaware of how much you’re spending and will often assume that there’s plenty of money left in your account.
Helps you save for unexpected costs
Could you afford an unexpected major expense?
Nobody plans for their washing machine or car to break down, but these things happen.
Budgeting for an emergency fund will help you prepare for unexpected costs so you don’t have to borrow money to repair items that can go wrong or put your savings goals on hold.
Examples of common unexpected costs include:
- Medical emergencies
- Pet emergencies
- Auto repairs
- Home repairs such as a burst pipe
- Unplanned travel
- Funeral expenses
Make a list of the unexpected costs that you have had over the past two years and use that as a guide for how much to budget for your emergency fund pot.
Aim for this fund to cover three to six months of unexpected costs at a time to avoid affecting your financial situation.
It’s important not to confuse unexpected costs with irregular costs such as your annual insurance renewal, which should be covered in your average expenses instead.
There is also a fine line between having enough emergency savings and too much, which is why careful planning is required.
Too much emergency cash will stop the money from being used elsewhere such as paying off debt or saving.
Helps you keep track and achieve your financial goals
After you’ve decided what your financial goals are and prioritized them accordingly, budgeting will keep you focused, meaning you are much more likely to achieve them.
When you’re setting financial goals, use the SMART-goal strategy (Specific, Measurable, Achievable, Relevant, and Timely) to set you up for success.
Whether you’re a seven-year-old wanting a new bike or an adult wanting to buy a new car, using different types of budget to save for something that you can’t afford right now will ensure you reach your target without getting yourself into debt.
To achieve the goals you need to live by a budget plan and know how to monitor budgets to keep you on the right path to meeting them and know your financial limits.
Eliminates wasteful spending
Wasteful spending includes any unnecessary purchases that will leave you short of money for the things that matter such as saving.
Common wasteful spending among Americans includes:
- Paying excessive or unnecessary fees and interest rates
- Impulse buying
- Unreturned items that are not needed
- Using excessive electricity or gas
- Throwing our expired food or leftovers
- Buying luxury items
Budgeting will reveal all of your spending habits, good and bad, so you can start making the right changes and cut out wasteful spending.
A budgeting tool or app can be a really easy and effective way to set up your budget and manage your finances.
These tools also provide real-time information so you can make more informed buying decisions based on whether you can afford a purchase or not.
Another great feature is automatic alerts that can remind you of an upcoming due date for bills to help you avoid missed or late payment fees.
Another top tip is to work out how much you spend on unnecessary items over a period of a month and a year. For example, if you spent $1.50 on two sodas five days a week for 20 days, it will cost you $60 a month and a huge $720 a year.
Looking at your expenditure in this way can help you resist the temptation of items you don’t need.
All age groups are prone to wasteful spending, which is why budgeting is important regardless of how old or young you are.
Helps you prioritize saving
The importance of budget allocation is key when it comes to meeting your savings targets.
Budgeting allows you to prioritize your savings pot before you spend every cent on other areas.
Every time you receive your paycheck, move your allocated amount for saving into your savings account first.
Then you can use the rest of your income for living expenses.
One of the best things about budgeting is that it can be adapted to fit your lifestyle and accommodate your savings goals.
For example, if you’re saving to buy a house you can increase your savings budget and cut back in other areas.
If you get a pay rise at work you can use that extra money to increase other areas of expenditure such as leisure.
Without a budget, you are much more likely to spend more is necessary and dip back into your savings fund.
Keeps you out of debt
Tackling debt is much easier when you set a budget that works.
Budgeting can also help people stop feeling overwhelmed by the amount of debt they have, which often leads to mental health issues.
The key to successful budgeting is accuracy. A budget will allow you to reduce and eventually eliminate your debt.
Start by looking at the balances of all your debt and make a list in order of priority (highest interest rates and largest balances).
A high-interest debt means high repayments, so tackling them first will make a big difference to your monthly finances and how much money you have to put towards saving.
Consider cutting up your credit cards, or at least giving them to a family member so you only use them in an emergency situation.
Removing the temptation of spending is key to successful budgeting and saving.
What is zero-based budgeting?
Give your money a purpose with the zero-based budgeting method.
Your income minus your outgoings need to equal zero by the end of the month by allocating a budget to expenses, debt payments and savings.
Let’s say you earn $2500 per month. Your budget would look something like this:
Before starting a zero-based budget, plan your spending by:
- Finding out your total income from paychecks, benefits and any other sources of monthly income.
- Track your expenses over a few months to find out what you typically spend.
- Categorize all your expenses into needs, wants, debt repayments and savings goals.
Budgeting is for all ages
When you’re in your 20s, life is exciting and full of potential.
There is no better time to start budgeting so you can save money for your future, and even your retirement.
If you have a steady job, the 50/30/20 budgeting method is an effective tool to keep you on track.
You dedicate 50% of your income towards living expenses such as rent/mortgage, food and bills. 30% is allocated to flexible spending like gym memberships and eating out.
The final 20% is for saving and debt repayments.
When you’re in your 40s, your financial priorities will likely change.
Budgeting can significantly help you save for retirement and paying towards your children’s college or university education.
Curb your overspending and start a budget today.
What will you do with your extra savings gained from budgeting?
In short, budgeting is important because it helps you save more money by controlling your spending.
Without a budget, you won’t know what your full saving potential is, which means it could take longer to reach your goals.
All you need to do is get organized and budgeting really can change your life.
Head over to our blog for the latest budgeting tips and to find out everything you need to know about saving.