8 Benefits of Budgeting
Budgeting is simply tallying up your income and expenses to ensure you are living within your financial means. I rarely find someone who doesn’t have some positive or negative reaction to putting together a budget. When you hear the word budget, what words for feelings come to mind?
Most people fall into two categories: those that cringe and those that get excited. Regardless of your feelings, a budget is important for people in any financial situation.
For those who cringe, you might think of a budget as being restrictive, taking too much time, being too complicated, or not enjoying your hard-earned money. However, budgeting doesn’t have to be any of those things. While yes, proper budgeting does take more mental energy than {Name Your Favorite Saturday Activity}, it does provide powerful benefits to those who engage in it.
Budgeting Lowers Stress. When you plan for future expenses, you have peace of mind that you know how you will cover those expected and unexpected expenses. Upcoming utility bills, weekly grocery shopping, and that semi-annual car insurance all become more manageable when they are tracked and money is set aside for when they arrive, avoiding those even more stressful, not to mention costly, late fees or overdraft charges. Who doesn’t want to reduce their stress levels?
Budgeting Puts You in Control. Dave Ramsey is one of the biggest budgeting advocates out there. He puts it like this: “Budgeting is telling your money where to go, rather than wondering where it went.” Through budgeting, you are directing your money to go to the things that matter most in your life first. If you don’t know what those things are, read my article about setting financial goals to get started!
Budgeting educates you on basic money topics. Building your budget and tracking expenses can educate you on the basics of income, taxes, and cash flow, enabling you to tackle and understand more complicated personal finance.
Budgeting saves you Money. I’m not only talking about saving money through cutting out unnecessary or forgotten expenses, which budgeting can help you do. When you become engaged in your finances, you become more empowered to be your own financial advocate. Professionals can aid you in navigating the financial landscape but learning the basic tools of the trade can help you ask better questions and achieve better outcomes. Budgeting can also catch fraud earlier as you’ll see irregularities more quickly allowing you to contact your financial institution to rectify the fraud and limit the damage.
Budgeting prepares you for minor, unexpected expenses. Once you’ve been budgeting for a year, you’ll be better able to plan for and manage those irregular expenses, like the birthday present for your nephew or getting new tires on your car.
Budgeting helps prevent disaster. Once you have a budget in place, you’ll be able to determine if you can undertake different opportunities or obligations. Your budget can help you decide on major life decisions such as how much home you can afford, whether you should take on those student loans, or when to retire. It can help determine if that job change is really a financial benefit or if it is a step backward. These decisions, if made without the insight of a budget, could lead to costly financial consequences down the line.
Budgeting clarifies the future. As a planner, I love walking through what the future might look like. From planning for retirement to saving for education, each person approaches their goals with a unique set of financial priorities and circumstances. How much money someone might need to reach their financial goals depends on their goals. As an overly simplified example, let’s use the popular 4% Withdrawal Rule to estimate how much of a portfolio you might need to support your spending. Under this rule, a $200 per month dining out budget would require a $60,000 portfolio to support it, whereas a $300 per month budget would require a $90,000 portfolio. However, if you don’t know if you will spend $200 per month or $300 per month, planning for the future will be more challenging.
Budgeting is a stepping-stone to Financial Independence. If you do not know what financial resources and financial obligations you have, how do you know if you are on track for financial independence? Budgeting gives you the confidence to start your own business or to transition to retirement.
I hope you can see how budgeting can help you reach your financial goals. If you are ready to start, check out my series on budgeting. The purpose of the series is to give you the resources to create your own budget and take control of your money! In it, you’ll learn:
- Budgeting Part 1: The Basics – Gilbert Wealth
- Budgeting Part 2: Income and Expenses – Gilbert Wealth
- Automating your Budgeting Process
