The Power of Budgeting

A lot of financial advice and investing in the stock market can only be done with extra money. There’s two ways to have more disposable income in this life, either make more money or spend less of the money you earn. For those who are on a salary at work making more money than your salary is difficult – unless those individuals have a side business. This is where the power of budgeting comes into play. But if you have never lived on a budget, or haven’t experienced all the benefits that budgeting has to offer, it’s easy to wonder why it’s such a huge part of personal finance. So why is it such an important foundational step in personal finance?

In short, budgeting is important because it helps you control your spending, track your expenses, and save more money.  Additionally, budgeting can help you make better financial decisions, prepare for emergencies, get out of debt, and stay focused on long term financial goals.

Living on a budget is a pretty fundamental aspect of proper financial management.

There are five main reasons how budgeting can help you achieve better financial outcomes in your life:

1. Budgeting helps control your spending

Let’s be honest, when you operate without a budget, you don’t really have anything holding you back from spending beyond your means. You might have a general idea of how much you make per month and how much you can spend per month, but without hard numbers, it’s easy to lose track of your spending habits.

I’ve spent some period of time doing this. I’d take my girlfriend out to eat at fancy restaurants and drop 100-200 bucks in one evening thinking that was fine. Then we’d take a weekend trip to go skiing at Snowbird or various other places. It was hard to make accurate guesses as to where my money was going because at the end of the month, I’d be broke and have tons of charges on my credit card. The issue is buying lunch every day at work and going out to eat with your significant other on the weekends might seem great – and it is often – but those little costs add up.

In keeping track of every expenditure and placing it against a budgeted amount at the start of the month for each spending category like – going out to eat. You’ll have much better control of your spending and know exactly where you are spending too much.

2. It helps lead to a better retirement

Let’s say you spend your money responsibly, follow your budget to a T, and never carry credit card debt. That’s amazing! But people who do this are forgetting something. As critical as it is to not over spend, it’s also just as important to develop an IRA/401k and build a nice nest egg for retirement. 

A budget can help you do just that. It can help you allocate your monthly income towards savings and investments each month. If you set aside enough money for IRAs, 401ks or other retirement plans, you’ll eventually build a nice nest egg. Although, you’ll probably need to sacrifice some now in order to max those plans out. It will be worth it down the road in order to live a better life in old age. Would you rather spend time golfing and relaxing in retirement? Or working as a greeter at Walmart to make ends meet?

3. It helps prepare you for emergencies

 Life is filled with unexpected surprises, some better than others. When you get laid off, become sick or injured, go through a divorce, or have a death in the family, it can lead to some serious financial turmoil. Of course, it seems like these emergencies always arise at the worst possible time—when you’re already strapped for cash. This is exactly why everyone needs an emergency fund.

Your budget should include an emergency fund that consists of at least three to six months’ worth of living expenses. This extra money will ensure that you don’t spiral into the depths of debt after a life crisis. Of course, it will take time to save up three to six months’ worth of living expenses.

Don’t try to dump the majority of your paycheck into your emergency fund right away. Build it into your budget, set realistic goals and start small. Even if you put just $10 to $30 aside each week, your emergency fund will slowly build up.

4. Helps ensure you don’t over spend

Far too many consumers spend money they don’t have—and we owe it all to credit cards. As a matter of fact, the average credit card debt per household reached $7,104 in 2019.¹

Before the age of the credit card, people tended to know if they were living within their means. At the end of the month, if they had enough money left to pay the bills and sock some away in savings, they were on track. These days, people who overuse and abuse credit cards don’t always realize they’re overspending until they’re drowning in debt.

However, if you create and stick to a budget, you’ll never find yourself in this terrible position. You’ll know exactly how much money you earn, how much you can afford to spend each month and how much you need to save. Sure, crunching numbers and keeping track of a budget isn’t nearly as much fun as going on a shameless shopping spree. But look at it this way: when your spend-happy friends are making an appointment with a debt counselor this time next year, you’ll be jetting off for that European adventure you’ve been saving for—or better yet, moving into your new home.

5. Budgeting can keep people from being overwhelmed

If there is one thing in particular that doesn’t mix well with feeling overwhelmed, it’s personal finance.

In fact, I’ve never met anybody that enjoys feeling overwhelmed. So, I think it’s fair to say that feeling overwhelmed just straight-up sucks.

The good news is that one of the best ways to combat the feeling of anxiety is to live your life on a budget. That way, you never spend beyond your means, you are always well-prepared for unexpected expenses, and fewer things have the ability to jump up and bite you.

Summary:

To end with, we all just need to learn how to budget, if we don’t already. It can help us make better financial decisions, retire on better footing, get us out of debt, and prepare us more for emergencies. As far as good financial habits you can develop, budgeting is likely the single most important habit to develop for financial freedom.

Lastly, if you are trying to build wealth and invest, try using m1 finance (you’ll get an extra $10 dollars with the referral link) is a great platform to use for that. Or if you’re just starting out your budget and need some guidance, YNAB (you and I will both get a free month if you sign up with the referral link) is a great option and highly recommended. And finally, if you’re looking for further ways to enhance returns check out our high risk and ultra-high risk newsletter .

Note: the m1 referral link gives the reader $10 extra dollars to invest with if they choose to fund a taxable with $100 dollars within 30 days of opening the account or fund an IRA with $500 within 30 days of opening an account. The author of this article will receive a $10 dollar compensation as a result of the reader opening an account. The compensation for both parties occurs 30 days after the deposit occurs and assumes the full amount is retained in the account until the end of 30 days from the deposit day. YNAB offers a free month of use this will be given to both the author and reader if the reader subscribes after the free trail period and buys a month of subscription. The author uses and endorses both YNAB and M1 Finance and both links are affiliate links.

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1. https://www.nerdwallet.com/blog/average-credit-card-debt-household/#