Budgeting. It is hard to imagine someone saying the word without some kind of pursed lip or an eye roll. So, why budget? Well, creating and maintaining some method for tracking and managing your spending is the absolute foundation of your current and future financial wellness.
The good news? Budgeting doesn’t have to mean tracking every penny or limiting your spending on things that are important to you. To the contrary, budgeting ensures that you are spending in your own best interests.
Below you can explore why budgeting is so important.
NOTE: Already convinced you need to budget but aren’t sure how? Discover 14 different ways to approach monitoring and planning your income and expenses. There is a way to budget that will fit your personality, values, and needs.
What is Budgeting?
Budgeting is the process of creating a plan for how to spend, save, and manage money. It involves estimating income and expenses over a specific period, typically a month, quarter, or year. (However, for retirement, you’ll want to create a budget for the 10, 20, 30, 40 or many more years you’ll be living without work income.)
Budgeting is the cornerstone of financial wellness. When you are aware and in control of your income and spending, you can prioritize what is important and set goals.
Budgeting (monitoring income and expenses) is to financial wellness as:
- Diet and exercise are to good health
- GPS is useful to reaching your destination
- The foundation and frame of a building holds up the structure
Budgeting is important for several reasons. Let’s explore X reasons to track your income and expenses.
Budgeting is not merely about what you buy. An important part of your budget is knowing how much you can and do allocate to savings. Maintaining a budget helps you prioritize saving. Think of savings as your the most important personal expense in your budget.
Because budgeting helps you focus on allocating money toward savings, it will help you achieve your long term financial goals.
Whether you are saving to buy a house, fund kids’ college, or for your own retirement, a budget helps you be accountable to those goals and enables you to measure your progress.
When you are maintaining and adhering to a budget, you are less likely to go into debt or dig yourself into a financial hole. You know what you have to spend and are more likely to stay within those confines.
Budgeting is an effective tool for managing and reducing debt. By tracking your income and expenses, you can identify areas where you can cut back and allocate more funds towards paying off debts, thereby accelerating your progress towards financial freedom.
Besides preventing the stress that debt brings on, maintaining a budget helps you avoid the unknown which is scientifically proven to be stressful.
Spending without a budget can be so emotionally fraught. You simply don’t know if you can afford whatever it is you are buying. Or, even if you are sure you can afford it today, you may not know if the expense will curtail you from being able to buy something else you really want or need tomorrow.
By maintaining a budget you can get rid of that uncertainty in your life and feel more confident.
Budgeting helps you understand where your money is going, identify any spending patterns or habits, and gain a clear picture of your financial health. This awareness is crucial for making informed decisions and taking control of your finances.
If you aren’t maintaining a budget, you probably aren’t aware of just how much you are spending in different categories.
You probably have thousands of budget conscious thoughts every month. It may cross your mind when you flip on the TV to cancel some of your subscriptions. Or, maybe you feel some degree of regret when the organic raspberries go moldy. But, fleeting thoughts don’t usually result in concrete actions.
You are more likely to cancel subscriptions and stop tossing unneeded extras into your cart at the grocery store if you see their impact over the course of the month as reflected in your budget.
Budgeting provides a clear picture of your financial situation and helps you stay in control of your money. It allows you to track income and expenses, identify areas of overspending or wastefulness, and make necessary adjustments to stay within your means.
With a budget, you can prioritize your expenses based on their importance and align them with your values and priorities. It helps you distinguish between needs and wants, ensuring that essential expenses are covered before allocating money to discretionary items.
I was pretty shocked when I saw what I was spending on take out dinners when I started budgeting. It really made me realize that mediocre meals were far less important to me than travel and I shifted my spending patterns.
Budgeting promotes thoughtful financial decision-making. When you have a budget in place, you can make informed choices about spending, saving, and investing. It helps you evaluate the potential impact of financial decisions on your overall financial well-being.