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Do I need a budget? The definitive answer is YES. To illustrate the importance of a budget, let’s compare it to something most people can relate to, a family vacation.
For this metaphor, let’s say your financial goals are the destination and your budget is the map. Would you leave home on vacation without a map (i.e. some way of determining where you are and how to get to your destination)? For most people, the answer is no.
So why would you treat your personal finances any differently? Why would you live your life with no idea where you stand financially or how to use your finances to achieve your financial goals?
If you’re interested in starting a budget, please read: How to Create a Simple Monthly Household Budget
If you need more convincing, please see below a list of 11 reasons why you need a budget.
Table of Contents
Add a Measure of Control
Creating a budget gives you back control of your finances. To continue with the metaphor above, creating a budget is like stopping and buying a map.
With the map, you now know where you are and can start heading in the direction you want to go. Your budget accomplishes the same goal. By tracking your income and expenses each month you get a clear picture of how you’re doing (good or bad) and can begin figuring out how to achieve your financial goals.
Stop Overspending
People who don’t have a budget often end up overspending each month. If you don’t know how much income you receive each month and how much your spending on expenses, it’s very difficult to know if you’re overspending each month.
Overspending limits the amount of money you have available to devote towards other things, like putting money in savings or retirement, or even just treating the family.
In addition, if that overspending ends up as more debt each month, you’re stealing money from your future-self and actually getting further away from your financial goals. Imagine 5 or 10 years from now paying off the debt you accumulated now. Would your future-self appreciate those extra years of servitude?
Cut Out Unnecessary Expenses
In addition to the money saved on cutting out overspending, budgeting can also help you identify expenses that you don’t use or need. Do you have a gym membership that never gets used? Or a magazine subscription that you forgot you even had?
Creating a budget will help you identify these unnecessary expenses, so that you can cut them out. This will free up more of your spending power for things you actually care about and make you happy.
Align Your Spending with Your Values
This goes hand-in-hand with cutting out unnecessary expenses. Once you have control of your finances, not only can you cut out those items that are unnecessary, you can decide to keep or add in the ones that are important to you.
Perhaps one of the most important things to you is your family’s health. If you have control of your finances, you can decide to cut some spending on entertainment and instead spend money on meals with grass-fed, organic meats and organic vegetables.
Or maybe you are an aspiring musician. You can car pool or use public transportation for a few months and save up for studio time to record some tracks.
Save Money
Another added benefit of freeing up some of that spending power is that you can begin allocating a portion of your budget to saving money. Saving money is important because it leads to building wealth, which will ultimate help you achieve your financial goals. Whether it’s owning a home, buying the car of your dreams, owning your own business, or even just retiring one day, the money you put into savings and, ultimately, investments will help you accomplish those financial goals.
Worry Less, Sleep More
Speaking of saving money (see how these mostly build on each other), when you start saving money and have a little buffer between you and all the financial emergencies that will inevitably come up, they’ll slowly stop feeling like emergencies.
That little extra buffer will be able to handle most small financial emergencies (assuming you keep replenishing it) and only the big stuff will give you pause.
Later, when you’ve paid off your debt and have a larger emergency fund, even the big stuff won’t phase you. You won’t be happy to pay it, but you’ll be able to pay it without going into debt.
When you’re able to handle most of your life’s financial emergencies, you won’t worry about money nearly as much. You’ll still have a budget and still keep tracking towards your goals, but you’ll feel motivated now to continue on because you realize that reaching your goals is actually a possibility.
As a result, you’ll sleep better, perform better at work, be healthier, and be happier.
Improve Your Relationships
Creating a budget and sticking to it has the added benefit of improving your relationships. If you have a partner or share finances with someone, personal finances can be a major point of contention. Creating a budget together forces you to talk about finances and get on the same page about your financial goals.
Build Strong, Positive Financial Habits
If you haven’t already, I recommend reading, “The Power of Habit: Why We Do What We Do in Life and Business” by Charles Duhigg. In it he talks about keystone habits which are “small changes or habits that people introduce into their routines that unintentionally carry over into other aspect of their live.”
When you start budgeting each month, it will eventually turn into a habit. If you do it long enough, it will become a keystone habit, effecting how you approach other areas of your life.
For me, updating the budget each month has led to cutting down on fast food spending, spending less time in front of a computer or television, more actively engaging in our investing, running more, etc.
This one small, positive financial habit has led to changes that not only affect my personal finances, but also affects my attitude, performance, and health.
Create Flexibility
Once you’ve created a budget and have been able to build up some money in your savings, you’ll be ready to not only handle any problems you may have, but also receive any opportunities that may come your way.
For example, let’s say you are an amateur real estate investor. A wholesaler approaches you about a great deal on a property, but they need an answer quickly and it’s only available if you can pay cash. If you have the money in savings or in other investments, you could actually consider this offer and accept it if it makes sense for you.
As another example, let’s say you work for a small business in town. You’ve worked for the owner for years and they are planning to sell the store and retire. They approach you first about buying them out and owning the business. If you have a little money in savings and investments, you could consider their offer and possibly be the proud owner of a small business.
Help You Reach Your Financial Goals
If you create a budget with your financial goals in mind and stick with it, its much more likely that you’ll achieve those goals. It may feel like forever when you’re first starting off, especially if you have a considerable amount of debt because you’ll be fighting to just keep up with debt payments. However, with incremental progress, you’ll eventually get out of debt and once you get out of debt and realize the full power of your income, you’ll be surprised how much faster you’ll start tracking towards your goals.
Starting a Budget is Simple
Starting a budget doesn’t have to be hard. It can be as simple as a notebook or excel sheet that tracks your income and expenses each month. If you do it right, it shouldn’t take more than 15-45 minutes each month.
For more information, please read: How to Create a Simple Monthly Household Budget
Why You Need a Budget – Conclusion
I hope that the reasons above have convinced you that you need a budget, because you do. I wholeheartedly believe that everyone can benefit from a budget, rich and poor alike. If you haven’t already started a budget, what are you waiting for? Get started now!
Why do you budget?