What are the benefits of budgeting, and is it really necessary to implement this practice? Many, and absolutely yes! Check out 10 reasons why you should start budgeting today!
Why is budgeting important? You might be asking. Well, tough financial times can come upon any of us. It doesn’t have to be caused by some global pandemic or an international financial meltdown. Sadly, losing our jobs, illnesses, setbacks in business or life in general happen, and that can lead to hard financial times.
The ever-present nature of such risk should be reason enough to make us realize the importance of budgeting, and implementing it as part of our everyday life to be prepared for whatever may come. What are the benefits of budgeting, besides being ready for the unexpected? There are actually quite a few of them, and we’ll be exploring them below. Read along!
1. Preparing for the worst
As we touched on in the introduction, anything can happen in our lives at the most inopportune moments. Many things in the world are beyond our control and even when we are careful, diligent, and responsible for our entire lives, there still could come a day when we lose our job, become sick, or are forced to give up work to take care of a loved one, and being prepared for it is one of the greatest benefits of using a budget.
For many of us, the risks of these things happening are lower while we’re young, but that’s exactly why it’s important to implement this habit as early as possible. Budgeting will bring extra money to your savings pot in small increments, which require time to accrue and become meaningful sums. The sooner you start, the more you safeguard yourself and your family for the future.
2. Create more disposable income
Another clear benefit of budgeting is to generate more disposable income for yourself. By cutting out unnecessary expenditure, you free up money for other things, which could mean something you’ve always wanted to buy suddenly becomes affordable. A good example of this is when people budget by eliminating a car from their lives. If they find they don’t need the car, and can therefore cut out maintenance, gasoline, insurance, and other related costs each year, they suddenly have hundreds or even thousands of extra dollars each year to use in another area of life.
3. Reduce waste
When you spend time analyzing and reflecting upon your income and expenditure, you can start to discover areas of your life that are proving wasteful financially. For instance, compare the amount you spend each week on ordering food from outside vendors versus how much you spent that one week in January after a New Year’s resolution that you went to the grocery store and cooked at home. You’ll find that you’re wasting obscene sums paying the premiums that come with commercially made meals, delivery charges, and tips.
Financial waste can occur everywhere in your life. You might have an unused gym subscription, late library book fees, unnecessary car insurance, high utility bills, an expensive phone plan…the list goes on. One of the advantages of budgeting is that it will help you bring this waste under control.
4. Trains you in decision making
To budget is to sacrifice, and to sacrifice is to make tough decisions. While many people might think that this is one of the disadvantages of budgeting, it’s actually a positive skill you’ll be acquiring. If you’ve ever met people in your life who seem very decisive, assertive, and confident about making choices, then there’s a good chance that this person has some experience budgeting. To be able to look at your expenditure and make cuts from it based on your real needs is a great character-building exercise.
If you practice it while you’re young, it will help you a lot in both your personal and professional life. Decisive people tend to be happier because they are comfortable with making decisions and sticking to them, even if they go wrong. They don’t waste time pining in hindsight and instead move on to make better future choices. Any way in which you look at it, one of the greatest budgeting advantages is that it will help you develop strong personality traits.
5. Nurtures financial discipline
When you discover the benefits of creating a budget and start budgeting on a daily basis, you begin to foster a sense of financial discipline that will stay with you in the longer term. Very often, it’s people with no concept of budgeting who find themselves in the most financial trouble. They live beyond their means, get into debt, and end up suffering as a result of poor credit scores and an inability to get a foot on the ladder of success.
Financial discipline translates into other kinds of discipline in your life, too. To be able to resist spending splurges and financial waste is the same kind of self-control that will stop you from overeating and gaining weight. It’s also the same sense of control that will prevent you from abandoning a day of exercise because you’re feeling a little tired or lazy that day. Like the trait of decisiveness, the trait of mental discipline is another positive advantage of having a budget and sticking to it.
6. Offers insight into your lifestyle
When people start budgeting, they start to understand their own lives better. If you were to stop several people in the street and ask them about their personal finances, there’s a good chance that only a small number of them will have any kind of exact figures in their heads. People generally have no idea what they spend on various things, and are shocked to learn the reality of their spending.
In a memorable episode of the hit HBO show Sex and the City, the main character Carrie Bradshaw is facing homelessness after she finds herself unable to qualify for a mortgage to buy her apartment and stop it from being sold from under her. She is mortified to learn from her friend Miranda that her shoe-buying habit has cost her $40,000 over the years — just the kind of money she needed for her down payment and to qualify for the mortgage.
To enact a budgeting habit in your 20s is to ensure that in your 30s you will have accrued enough savings to do something really significant with your life, be it buy your own apartment, start a business, or make a lucrative investment in something.
7. Avoid debt traps
We touched on this further above, but one of the main reasons why it is important to have a budget is to avoid being trapped in a self-abusive cycle of debt. There are many people who take credit cards and use them for their daily spending, believing that it’s just a stop-gap to better financial times. The fact is, however, that if you don’t have a budget and a longer-term financial plan in place, then you can end up in serious trouble.
Credit cards, store cards, payday loans, and other instant financial products are frequently charged at massive rates of interest. Some people spend months and months paying off what is objectively a fairly small debt because they are constantly paying interest and never saving enough to properly pay off the capital. Being careful, having a budget, and not relying on credit is hugely beneficial to your long-term financial health.
8. Long-term financial freedom
Budgeting in the very short term only saves small amounts of money, but when you build up those amounts over a long period of time, they really add up. The money you ultimately have can be enough to make certain investments or arrangements that give you financial freedom in the future.
Imagine that you’re now 22 years old, working in an office on a fair starting salary, but you want to live frugally now in order to escape the hum-drum office life later. You budget carefully and work out that you can save about $400 a month compared to your current spending levels by taking a few simple steps. You do that diligently and competently every month for the next 13 years.
Now you’re 35 years old, and that pot has at least $62,400 based on just $400 of savings a month for those 13 years. Think about your current life situation as it is now, and then think about how different your life situation could be if you had $62,000 additional dollars in your bank.
9. Allows planning for the future
To budget is, essentially, to make a plan. When you are budgeting, you are planning your monthly finances, and thus by extension your annual finances. When you know exactly how much you can make and save in one year, you can carry it into future years and beyond. Soon you have a financial plan where you start to see what you’ll have in 5 years, in 10 years, and beyond. Even if your income is irregular at the moment, having a flexible income also has advantages you can benefit from.
This knowledge helps you to make plans for the future. If you know your budgeting will save you at least a certain amount each month, then you can create contingency funds, separate savings pots for individual purchases, and even plans for investing in a business or property at some point in the future.
10. Reduces stress
Budgeting may seem boring on the surface, and to have more disadvantages than advantages. Where’s the fun, right? That’s understandable, but in fact, one of the most enjoyable benefits of personal budgeting is the one-way ticket to a life in which your stress levels are either eliminated entirely or at least vastly reduced.
When you look after the small amounts in the short term, the bigger long-term rewards become an inevitability. As your wealth grows, you can breathe easier, knowing you don’t have to worry about financial hardship.
Budgeting and financial planning may seem a rather dull activity, and in the short term may cost you one or two small pleasures. But the discipline to be able to forgo short-term gratification for greater long-term stability is arguably the best thing you can possibly do for yourself and your family. Learn the discipline of budgeting now so you can enjoy the benefits and joys of genuine wealth later on.