Do you feel like you need to get your financial situation together? Chances are, you need a budget in your life…ASAP!
But if you have never had exposure to budgeting, you may be thinking, “why is budgeting so important”?
According to this article by CNBC, the average American has $90,460 of consumer debt.
How the hell are you supposed to get a handle on that amount of debt without a budget?
Once upon a time, we were one of the “average Americans” lumped into this statistic. After a series of expensive mishaps in 2019, we were deep in debt and needed to take control of our finances.
Long story short, we learned to budget our money. A budget was life-changing for us!
A little over a year later, we were in control of our money and paid off a total of $227,000 of debt, most importantly by sticking to our monthly budget.
Budgeting is the key to financial stability!
So, if you want to know more about the importance of budgeting and how to get started…keep reading!
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- 1 What is budgeting
- 2 Why budgeting is important
- 3 Advantages of budgeting
- 4 Basics of budgeting
- 5 Best budgeting tips
- 6 Frequently asked questions about budgeting
- 6.1 Can you create a budget on an irregular income?
- 6.2 What’s the best budgeting app?
- 6.3 What are budget categories?
- 6.4 What’s the best budgeting method?
- 7 Final thoughts about the importance of budgeting…
What is budgeting
A budget is simply making a plan for your family’s money every month. That’s it!
Most of us spend money as it comes in with no thought about how we spend it.
This usually means no extra money at the end of the month. Or, worse, it leads to debt on a credit card because there is not enough money to cover all your living expenses.
A budget prioritizes your spending in a way that makes sense for your family and keeps you from overspending money you don’t have.
Why budgeting is important
A budget helps you make better financial decisions, changes your spending habits, and helps you achieve your financial goals.
Ultimately, it helps you reach financial freedom.
By creating budget categories that are important to your family, you can work to pay off credit card debt, save money, and build wealth.
But being on a budget just isn’t for people struggling financially. Everybody can benefit from a budget because it allows you to spend guilt-free! A budget shouldn’t make you afraid to spend money, as long as you have it to spend!
Advantages of budgeting
Like I said before, a budget was life-changing! But, let me further explain the benefits of budgeting…
Helps you control spending
When you create a spending plan and stick to it, there is no questioning where your money went at the end of the month.
Before Doug and I started budgeting, we spent so much money on insignificant things like food and convenience items.
When we sat down and looked at our spending, it totaled almost an extra mortgage payment…it was shocking how the little things added up to over $1000!
After we started budgeting, we actually had money left over! With the extra money we were saving (by not overspending), we were able to pay down our credit and eventually save money.
When you budget, you pay attention to the money you are spending and have more control over where it’s going.
Helps you reach financial goals
Whatever your financial goals are, a budget will help you stay focused on reaching them.
Say you want to save a down payment for a house. You set up a category for it and put what you can each month towards that goal. Then, when you reach that goal, you put that money towards another financial goal.
Helps to relieve financial stress
Financial stress can lead to sleepless nights and sometimes even manifest into a physical or mental health issue.
Creating a budget and plan for your debt takes the stress out of your life because you’re no longer wondering what bills you can pay and how you will pay them.
Basics of budgeting
So we’ve established that a budget is just making a plan for your money. You may be asking how exactly do you do that?
Let me start by saying that no one budget will look the same. There are multiple methods (that we’ll get into later), so if something isn’t working, make a change and figure out what does.
So, let’s look at the basic budgeting steps.
1. Look at your spending
The first thing you need to know is your spending habits. So, print off a couple months of bank statements, and take a good hard look at your spending money daily.
As you look, note the essential spending you do and the unnecessary and non-essential spending.
You’ll be shocked at the amount of unnecessary spending you make…I know I was!
2. Know your income
Next, total up your expected income. This should include all money coming in as well as your significant others.
3. List your expenses
Make a list of all your monthly living expenses. Start with all the essential expenses and then branch out to the non-essential things like gym memberships and streaming subscriptions.
Then, total all the expenses up.
Make sure to keep track of yearly expenses, so you don’t forget about them!
4. Find the difference
Lastly, subtract your expenses from your income. After you do this, you have two options.
- Figure out what to do with the excess remainder, like paying off credit cards, saving your emergency fund, or investing.
- Or, if there is not enough money to cover all your expenses, you have to make some cuts. So, figure out where to make those cuts and put that money toward the other payments that you need to make.
Best budgeting tips
Although budgeting is pretty easy, it can take a couple tries before it feels natural. Here are a couple budgeting tips that I think are the most important as you start your budgeting journey.
A budget absolutely can not work if you and your significant other aren’t on the same page. Finances are among the top marriage killers, so you need to discuss your financial situation and start budgeting together.
Set a date and time every month to have a budget meeting. This way, it becomes a routine.
Make sure to discuss the items in your budget. Just know that sometimes not every item will be approved by both of you. Stay calm, talk about why it’s important, and make compromises…you’re a team!
You’re not going to get your budget right the first time you do it. You’ll most likely forget some things and probably go over budget.
It took us a good three or four months before we really got the hang of the whole budgeting thing.
It can feel discouraging at first, but it will get easier after a couple tries…so don’t give up!
If you forget to budget something, make sure to revisit and revise your budget together throughout the month.
Create a realistic budget
Keep your budget realistic, or you’re not going to stick to it. Make sure to set a reasonable amount for each category you budget.
Don’t try to make budget cuts where you know you can’t. You’re setting yourself up for failure!
Set financial goals
Set short and long-term financial goals, and go over them every month at your budget meeting.
Knowing the status of your financial goals will keep you motivated to stay on budget.
Make sure to set these goals as a couple and even include your kids if they’re old enough (it’s never too early to teach your child to manage money).
Frequently asked questions about budgeting
Can you create a budget on an irregular income?
In short, you would budget for your lowest expected income for the month. Then, you would prioritize your expenses. For example, list your essential monthly expenses and then the non-essential ones.
When you get paid, you work down the list of prioritized payments. If you get paid a second time that month, you pick up where you left off on your list.
What’s the best budgeting app?
If you are a techy person, there are some great budgeting app options out there, both paid and free. A couple popular apps that are available are…
Everydollar App is a free budgeting tool by Ramsey Solutions. It is based on the zero-based budgeting method that Dave Ramsey recommends.
Mint is a free financial tool by Intuit. It lets you see your whole financial picture, from credit score to budgeting.
YNAB is a paid subscription that helps teach you how to budget and achieve your financial goals.
What are budget categories?
There are two different categories of budgeting, essential and non-essential.
The Essential categories are the expenses that you pay every month. These expenses are things you can’t live without.
For example, your family must have housing, utilities, food, and transportation. These are your priority budget items.
The non-essential categories are things you could possibly live without if you need to.
For example, you can live without (even though you think you can’t) cable, fun money, internet, or gym memberships. If you needed to save money in a pinch, those items could be cut.
What’s the best budgeting method?
I personally love and use the zero-based budgeting method. It’s simple and works for our family. But, the most popular budgeting methods are…
Cash envelope budgeting
Cash envelopes are where you use cash and envelopes instead of a paper budget. Each month you decide on an amount to place into your envelopes labeled with different categories, such as groceries or gas.
As you pay each category, you use the money in the envelopes. When the money is gone from your envelope, then it’s gone for the month.
Line Item Budget
This is your traditional budget. You list all of your upcoming monthly payments; usually, these carry over from month to month.
You subtract all the expenses from your income, and what is left over goes to paying off debt or saving/investing.
Zero-based budgeting assigns every dollar a place before the month even starts—for example, your monthly expenses, saving, and debt all go into a category. Your income minus expenses should equal zero at the end of the month.
Although you can choose whatever percentage you want, a popular proportional budget is the 50/30/20 budget.
You divide your monthly income into sections which include needs, wants, and saving/debt.
For example, with the 50/30/20 budget, your needs would take up 50%, wants 30%, and saving/debt payments 20% of your income.
Final thoughts about the importance of budgeting…
Budgeting helps you control your spending, pay off debt, and reach your financial goals.
In short, it’s the most important thing you can do for your family’s future.
Budgeting has changed our lives, and I’m sure it will change yours too!
What questions do you have about budgeting? Comment below and let me know!