Many people do not create budgets because they don’t understand the benefits of budgeting their money. Others create budgets but fail to stick to them. Having a budget, however, can easily help you minimize the risk of overspending, build wealth, and reach your saving goals.
I put together this simple guide to help you understand why a budget is essential for managing your finances and financial planning.
So, what is budgeting?
Budgeting is evaluating your income and expenses to understand your financial situation. In this process, you learn how your money is made and where it is spent. This helps you make financial decisions supported by meaningful and accurate calculations.
During the budgeting process, you combine all the numbers into a format known as a budget. A budget is nothing other than a detailed list of all your income, expenses, savings, future goals, etc. Budgets can be simple or complex, varying from one person to another.
Although it is extremely important to have a written budget that reflects your financial situation, most people choose not to create budgets. Others create budgets only to trash them a week later, resulting in living paycheck to paycheck and long-term financial hardships.
In this article, I will discuss six great benefits of budgeting your money you must know.
Without further ado, let’s get started.
Related: 7 steps to make a personal budget
1. A budget helps you prepare for emergencies
A budget is nothing other than a blueprint that helps you understand your finances and prepares you for what is yet to come. One thing that happens in our lives is that we cannot predict emergencies or decide when they occur. Emergencies just happen.
The only thing you can do is prepare yourself ahead of time by building a safety net. How do you get ready for emergencies?
One of the best ways to prepare for emergencies is to open and save money in an emergency fund. An emergency fund is budgeted money designed to help you cover emergencies. The best way to save for an emergency fund is through budgeting. Your budget is a great tool to help you save for an emergency fund as it allows you to calculate how much you can safely put aside until your emergency fund is fully built.
Related: 4 ways to save for emergency funds fast
2. Benefits of budgeting your money: A budget prevents you from spending more than you make
Budgeting is the only way to balance your income and expenses. Unfortunately, most people don’t budget, which leads to overspending and living paycheck to paycheck. GoBankingRates stated that 69% of Americans had less than $1,000 in their savings accounts in 2019.
Most people have nothing saved, not because they don’t make enough. Instead, they don’t know how to retain the money they earn. That is why one of the benefits of budgeting is to help you balance your income and expenses, allowing you to live within your means and avoid financial stress.
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A budget helps you increase your savings
One of the most essential benefits of budgeting is that it can help you increase your savings and reach financial goals.
Everyone talks about saving, but only a few people know how. Saving is not just putting $100 in a jar every month and hoping to become rich one day. Although there is no formula for saving, there are necessary steps that everyone should follow to boost their savings.
Saving money goes beyond putting a percentage of your income away. Proper saving techniques involve understanding exactly how much you are making and how to allocate it correctly. For example, you must cover essential expenses before you put money away. More importantly, there is no way you can know this information without a well-designed budget.
Sometimes, you will need to reduce your expenses to save more money. A good example you can relate to is when you are planning to save for a major purchase such as a house, car, or wedding. The budget will show you where you are spending more money than you should and where to cut back on expenses without negatively affecting your life.
- Related: 13 Benefits of saving money
4. The budget helps you eliminate unnecessary expenses
Most people are broke and have no savings, not because they don’t make enough money. Instead, they don’t know how to keep what they make. People make money but have no idea where it goes.
How do people live paycheck to paycheck even though they make enough money? The answer is simple. People don’t have financial goals and want to look rich instead of being rich. They spend their earnings on cute-looking clothes, the latest electronics, and fancy everything.
Then comes debt issues. People buy the latest cars, buy expensive houses they cannot afford to pay off and overspend on their credit cards, which leads to debt accumulation.
The only way to make financial plans is to understand how much you make and where you spend it. Trying to manage your money without a budget is like walking a marathon without a clear path or knowing your destination.
So, your budget is the only thing that will help you prioritize your expenses and make cuts when you have to. For example, if you want to save for a house down payment, you can eliminate all or some of your entertainment subscriptions. This is because you can still have a good life without having your Netflix subscriptions.
5. A budget helps you plan and save for retirement
Retirement savings is an essential step in financial planning. Most people don’t save for retirement and those who throw a few bucks into their 401(k)s wonder why they never get rich by the time they retire.
A budget usually allows you to allocate the right amount in your retirement savings accounts, allowing you to establish financial resilience. For example, while you can max your 401(k) and IRA each year, not everyone can reach this savings goal. With a budget, however, you can know exactly how much to contribute to your 401(k) plan and IRA without incurring financial stress.
6. A budget leads to a happy life
I learned many years ago that one of the lesser-known benefits of budgeting is that it can lead to a happier life. Nothing is more satisfying than knowing you will cover all your expenses without living on the streets. People with budgets tend to be more organized and happier than those without. This is because a budget allows them to make fewer financial mistakes, which helps lower financial stress and improve their happiness.
By counting every dollar you earn, you have enough savings to establish an emergency fund and invest in your financial future. These actions are the foundations of wealth-building and success in life.
