Managing bills and monthly expenses isn’t exactly the easiest thing in the entire world. But developing an ongoing process to track how much cash you are spending is an important step in financial planning. This article will outline 17 reasons for preparing a budget, and help walk you through getting started.
A good budgeting process will help you keep an eye on your financial situation on a regular basis and help you properly balance short-term goals and long term goals.
Putting together a good budget is really not the most difficult thing either. It’s just that growing up the vast majority of us weren’t taught the reasons for preparing a budget and tracking spending.
Without the basics of personal finance to prepare them, many people feel overwhelmed by what seems to be a complicated process. As a result, they don’t really have a good idea of how to manage debt payments, pay their monthly bills, or what to do at the end of each month if they have any extra money left over.
But the benefits of having a realistic budget can outweigh the concerns someone might have about putting a budget together. For example, a budget can:
- Help you learn how to use money wisely
- Help you put more money back in your savings account
- Make it easier to enjoy your life more since you’ll stress about money less
Frequently asked questions about budgeting
What is a budget?
A budget is an estimate of how much you plan on earning and spending within a set period of time. This could be a month, quarter, or year. There are a few types of budgets, like the 50-30-20 budget, the zero-based budget, or the cash envelope system.
When you prepare a cash budget you can see your overall income and expenses which can present you with choices you didn’t know you had. A good budget will stop you from overspending and getting into debt.
What types of budgets are there?
There are quite a few ways to develop a budget. Here are a couple of ways:
This is a budgeting process in which you allocate your after-tax dollars to certain categories. You don’t have to make this overly complex, and it provides flexibility as your variable expenses change from month to month.
- 50%: 50% of your after-tax money goes to necessities. This would include fixed expenses like rent/mortgage, car payments, basic groceries, gas, or work-related expenses that might be out of your control.
- 30%: 30% of your after-tax money goes to discretionary items. These would be expenses that you can control, like meals & entertainment, travel, and hobbies
- 20%: 20% of your after-tax money goes to savings or paying down certain types of debt. If you’re relatively debt free, then you’d be setting aside this money towards your long-term financial goals, like retirement planning.
The zero-based budget approach forces you to properly allocate every dollar that comes in. This might be what you’d see in business budget planning at a Fortune 500 company, larger organization, or in a government office.
From your monthly income, you would ensure that every dollar had a purpose. So if your monthly income from all income sources was $5,000, you would make sure your spending plan did not exceed $5,000 per month.
Cash envelope system
A cash envelope system simply takes the zero-based budget one step further. You actually withdraw cash for your expenses and allocate the cash to an appropriately marked envelope. When you reach your limit for the month (or biweekly period between paydays), you stop spending from that envelope.
Using the cash envelope system, you eliminate the use of credit cards, which often is the cause of too much debt. We’ve written more extensively about the cash envelope system in a separate article.
Just remember, there is no one best way to create a budget. The best way is the one that helps you achieve actual results and stick to your spending plan.
Why is budgeting important?
Because budgeting forces you create an actual plan around your monthly spending. As a result, you’re far less likely to overspend since you can see the overall impact of individual purchases.
This enables you to focus more on paying down debt or investing because you understand what money is available to do those.
Why don’t more people budget?
Because budgeting takes effort. Scrutinizing your finances at the detail required to create a budget isn’t easy. It can be extremely overwhelming, which makes it easy to put off.
But that’s why having a budget is important. You have to treat your finances like a small business. Budgeting by itself isn’t exciting. But the opportunities it opens up are.
What are the steps to prepare a budget?
You probably don’t need more than an hour to create a draft budget. It might need changes in the long run, but the important thing is to have something documented. That way, if you need to make changes in the future, you’ve got a spending plan that you created as a starting point.
1. Identify your monthly household income
Write down how much money is coming in every month. This should include all of your household income, such as your salary and side hustles. Do not count investment income unless you’re retired or receive significant cash flow from your investments.
Only include your actual take-home pay, not your gross pay.
2. Identify your monthly payments
You’ll then need to write down how much money is going out every month. You can do this by collecting all your monthly bills and creating specific budget categories.
The categories would be things like housing, utilities, transportation, groceries, etc. It might help to break down your categories into fixed expenses and variable expenses. That way, if you decide to start cutting back, you know what monthly expenses you can focus on.
3. Separate your variable expenses and categorize them.
Create categories for items where you don’t have set monthly bills. This might include groceries, gas, clothing, or entertainment.
Since you don’t have a specific amount due each month, you’ll need to come up with an estimate. Don’t worry about getting it perfect. You can adjust these monthly.
Some people like to keep track of their daily spending. This would be good for tracking discretionary spending, but not for accounting for your major fixed expenses.
4. Identify your monthly cashflow
Finally, subtract your total expenses from your total income. Whatever amount of cash is left should go to paying down any debts you have.
Once you are debt-free you can start using it for saving and investing. Regardless of how complex your life is, budgeting is simply this straightforward.
But it might not be easy. If you’re coming out of college, or divorcing with a lot of debt, this might seem insurmountable to you. It’s not.
Benefits of establishing a budget
When you prepare a budget, it helps you save money so that you can do things such as:
- Pay off debt: Get rid of those car loans, credit card debt and student loans
- Become better at managing your money: This is a skill that will help you for the rest of your life.
- Have more money to spend on what you love: We work so we can make money to spend on ourselves and our family.
17 reasons for preparing a budget TODAY!
1. Because you’ve tried not preparing a budget
You already know what happens when you don’t prepare a budget or you wouldn’t be looking on the internet for advice on how to budget. What’s the harm in learning how to make a budget?
Kidding aside, a lot of people resist learning how to create a budget because it requires them to be honest with themselves about their need for budgeting. When you write your spending habits down on paper, you expose a TON of bad habits.
That can make some folks wary of trying it. Good thing you’re not like other people.
2. Keeping to a budget can help you focus!
With budgeting, you won’t fall prey to short-term unnecessary costs that temporarily pique your interest. You avoid spending on items that don’t contribute to your big-picture financial goals, like buying a car, house, paying off your student loan, or making financial investments.
When you prepare a budget, it’s easier to really work towards these necessary and wise monetary investments.
3. Hey honey, when did we sign up for this?
Have you ever looked at your bank statements and said to yourself, “When did we sign up for this membership to the jelly of the month club? I don’t even like jelly!”
With a household budget, you essentially are doing a personal audit every month to reconcile all your expenses, so no more sneaky subscription bills getting by.
4. No more feeling guilty about spending money
Budget planners don’t tell you to not spend money. They give you guidance around how much money you have to spend so that you can be more intentional in buying what you really want.
Just make sure you keep a tab on the amount of money going to the categories that matter to you. For shoes and clothing, a good personal finance rule of thumb is around 3% of your monthly spending. But you may decide to spend less money on clothing and more on something else.
So go ahead and buy those new shoes, but make sure you have checked your budget worksheet first!
5. Puts you in the driver seat
Sometimes, we may feel like a victim of our money and bills, caught up in a never-ending payment cycle. A big advantage of a budget is that you can be intentional about your money. It gives you insight and control to start paying yourself first. In turn, this allows you to create financial stability over time.
Managing your money properly saves you the stress of suddenly having to adjust to a lack of funds or prepare for an emergency expense. You can decide what you’re willing to sacrifice in the short-term for the long-term.
It is said that with budgeting, you control your money. Your money doesn’t control you.
6. A huge sense of accomplishment
Learning how to budget money wisely is not easy. It takes a lot of dedication.
You can infer from those statistics, that while the majority of Americans are broke, only a small percentage take the next step to create a budget to help them change their situation.
This is why you should be extremely proud of yourself for seeing it through month after month. Budgeting is usually the first step in changing your finances. The success you have becomes a compounding effect in other areas, like paying down debt or investing.
7. No more overthinking!
How much mental energy do you invest thinking about what you can and can’t buy?
When you prepare a budget, you front-load all of that analysis to the beginning of the month, and then you go on autopilot, executing that plan throughout the month.
Goodbye juggling bill payments!
You can also kick it up a notch by using a budgeting technique referred to as the cash envelope system that we previously discussed.
In a nutshell, this is where you withdraw cash once a month to cover all your budget categories and use envelopes labeled by budget categories to manage your expenses. If you don’t have money in the envelope for it, you can’t buy it.
8. Prepare a budget to be acutely aware of your spending habits
If you want to improve your personal finances, you’re going to have to get up close and personal with how you are spending your money. You need to understand the different types of debt you have, how much you owe, and what they are costing you every month in interest and fees. Budgets put all of that on display, in black and white, every month.
9. Gets you out of debt WAY, WAY faster
A proper budget enables you to aggressively cut expenses, which means you are going to have a lot more money to apply to your debt pay-down strategy. Don’t limp along making minimum payments for years. Get in the fast lane!
10. More savings = More money
The more you save, the more you have to pay down debt. Then once a debt is paid off, you increase your monthly cash flow by putting the monthly payment right back in your pocket!
11. Save and invest more!
Guess what you can do with more money? You can begin investing in yourself and your future. This could mean you throw more money into your emergency fund, start ramping up your retirement, save for a vacation, or even start your investing for your non-retirement goals. Who knows, maybe you find yourself in the position where you can even retire early.
12. Reduced stress
A recent report from the American Psychological Association found that over 62% of Americans report being stressed about money. Life is way too short for that many people to be that stressed.
13. Increased sleep
According to the National Sleep Foundation, money stress has a huge impact on the quality and amount of sleep people get. I’m a huge fan of sleep. And with a little kid in the house, I’ve got enough things making it hard to have a good night’s sleep.
14. Better mental health, and more energy
Debt is tied so closely to personal and mental health that the emotional effects of being underwater are known to induce fear and bring upon depression and anxiety disorders. If you are feeling any of these things, please talk to someone.
Sharing your feelings with others can have a cathartic effect and relieve some of the emotional pressure you feel.
15. The family that saves together plays together
Family budgeting and savings is a fantastic way to bring families together around a common goal. It gives them a sense of responsibility and helps reinforce positive behaviors that will benefit them throughout their entire lives.
Tell the kids they can go to Disney next year if they help the family prepare a budget for it. It gets them engaged and invested so they have a reason to help and contribute.
16. Happy marriage
No one likes arguing about money. Especially when it’s with the person you share your life with. According to www.marriage.com, financial stress is the #2 cause of divorce.
Knowing the importance of planning a budget for your home, how can you not do everything in your power to reduce the opportunities for money fights?
17. Improve your overall quality of life
Imagine life with enough money to pay your bills, less stress and more sleep? Your marriage might have fewer arguments, and you’ll have more positive relationships with the important people in your life. Sounds pretty amazing right?
We all want to retire one day, and be able to step away from the stress and demands of the work cycle. That doesn’t come without intentional planning, you need to prepare a budget.
With budgeting, you have to divide your money into categories of expenditures, savings, and retirement investing, forcing you to be more aware of which category is taking more of your money. This helps you decide where your money should be going!
At the end of the day, If you don’t like what you see, you decide where the money goes, and more importantly, where it doesn’t. While budgeting isn’t an end-all-be-all for your financial woes, it gives you a ton of advantages.
Do you have other reasons for preparing a budget? Let us know by leaving a comment below!