I started learning about budgeting on our kitchen table, sitting side by side with my mom at 7 years old. We had a very pathetic budget to work with every month but somehow, my mom would always be able to stretch our money’s value. I’m telling you, she would give any so-called financial guru a run for their money with her financial IQ!
Over the years, that time at the kitchen table with my mom proved to be one of the best education I have ever received! She has given me the unparalleled gift of learning how to manage my money instead of having it manage me.
So why is having a budget VERY important? Well, let me count the ways…
1. A budget directs your money where to go
These days, you can pretty much go anywhere you’ve never been before with a GPS. It will direct you which road to take. It has turn by turn instructions for you while you’re driving. There are apps that can even give you the fastest route available. Some can re-route you when there are issues along the way, like road work, heavy traffic, or accidents.
In the same way, a budget is your money’s GPS. It guides your money where to go so you won’t have to wonder at the end of the month where your money went. You can dictate what to allot it for and for how much. Then, all you need to do is keep yourself on track with your spending.
How to make your budget is a topic for another day but for now, know that you need a budget regardless of whether you’re earning very little or you’re earning a whole lot. Let me repeat that again – a budget is a must if you want financial independence.
2. A budget allows you to pay yourself first
Whoever said to pay yourself first is a genius, because the secret to wealth is being able to put aside money for retirement, rainy day fund (also called emergency fund or Murphy’s Law fund) and/or sinking fund. Granting the money that you should be budgeting for is based on your net income, you should also be making sure that you take 15% off your gross income to set aside for retirement. You wouldn’t want to retire on the streets as a homeless person, would you?
As you budget your net income, however, you need to also make sure that you set aside some funds for emergencies first. Your goal is to have at least 3-6 months of your monthly living expense saved up just in case you lose your job or you’re unable to work. That way, you can still pay the bills until you get yourself back on your feet.
3. A budget will give you an idea of how you spend your money
At the end of the month, you can evaluate your spending based on the expenses you logged against that budget category.
Do you notice that you spend $5 everyday on coffee?
Or perhaps you seem to impulsively spend on shoes or bags because they’re on sale?
It’s time to be honest with yourself and evaluate your spending. Cut down the unnecessary “fat” on your budget. Maybe instead of buying that $5 coffee every single day, you can put that money aside to buy a nice coffee maker and DIY at home.
Instead of buying a bag or shoes that you just have to have but would only use once in a blue moon, maybe it’s time to divert that money towards beefing up your emergency fund.
The great thing about having a budget is that you’ll get to know where you actually spend money on and use that information to your advantage.
4. A budget will make sure you don’t spend more than you make
Have you ever had those moments when you wonder where your money went because there are still a few days or weeks left before your next paycheck and your money is gone? Like ka-poot gone! And then you feel anxiety and worry creep up because you still have more bills to pay with no money for them anymore. This is an indication that you, my dear, are spending more than you’re making. These are the kinds of stories that can lead to so much debt and, in some severe cases, bankruptcy.
A budget will make sure you know how much you can spend for the month. Then you can keep tabs on your spending and ensure that you don’t go overboard.
5. A budget will enable you to pay off your debt
Having your obligations front and center will make you realize how much you’re truly in the hook for. Whether you like it or not, any form of debt is an obligation.
Debt is money that was exchanged for something, whether goods (credit card debt to buy a shiny new gadget or that beautiful designer handbag, car debt, etc.), services (college or graduate school debt in exchange for a degree), or mortgage including HELOC or home equity line of credit. It can also include money you personally owe someone, also called personal debt, that was used to tide you over until the next paycheck.
Knowing how much you owe will allow you to create a plan on how to attack it by adding that category into your budget every month. The only caveat to this is that you have to be really honest with yourself how much you truly owe and promise yourself NEVER to get into debt EVER again.
Attacking debt is a lengthy topic in itself so let’s not get into that right now. For now though, just know that having a budget will enable you to pay off your debt. And man, this is a BIG enough reason for you to have a budget in place.
6. A budget makes you accountable
Have you ever heard the quote from John Di Lemme that says “accountability separates the wishers in life from the action-takers that care enough about their future to account for their daily actions”? It’s true, isn’t it? If we care deeply enough about our future, we have to be accountable to all the actions we take every single day.
Your monthly budget is your accountability partner. It will help track your spending and keep your priorities front and center.
You want a new computer? Start saving up for it by adding it to your monthly budget.
You want to go on vacation by summer? Calculate how much it’ll cost, divide the total by how many more months to go, and start saving up for it by adding it into your monthly budget. It’s an amazing feeling to go on vacation debt-free — when you’re not harassed by bills for that vacation when you get back from that relaxing trip.
7. A budget will teach you discipline
If you do not have the discipline towards money before, making a budget will exercise your discipline and self-control. It will build and flex these muscles so you will be financially stronger and more inclined to say NO to the things that are not in the budget for you. And by the way, NO is a sentence. You do not need any excuse beyond that.
A weekly rendezvous with friends at a bar can be costly when compounded over the course of a month. Maybe you can budget for it once a month and say NO to the other 3 occasions when your friends invite you. Perhaps this discipline will also challenge your friends to be disciplined with their hard-earned money too. Because let’s face it, if they really are your true friends, they would fully support you towards your goal of financial independence. If they mock you then perhaps it’s time to seek someone else’s company.
Remember, you are the average of the 5 people you spend your time with. So spend your time wisely and be with people you want to be the average of.
8. A budget will teach you patience and delayed gratification
Let’s face it, with the advent of social media, people want everything immediately. They want it and they want it NOW. Gone were the days when you would patiently save up for what you want and when you finally get enough funds to cover that purchase, it gives you profound joy and fulfillment.
When you see people on social media flaunting the latest and greatest gadget, you start wanting it too. Before you know it, you’ve charged it on your credit card knowing deep inside, you do not have the money to pay for that purchase so you pay for it every month instead. This new expense adds on to your anxiety of not having enough to cover all your bills. In no time, that shiny new gadget will become a burden rather than an accomplishment or a reward.
The feeling of being able to pay for something in cash without worrying about monthly payments or debt is such a rewarding and exhilarating feeling. Try it and you’ll know. Like my mom used to say “if you can’t pay for IT in cash, you cannot afford IT so don’t even try”. Make this your mantra.
Repeat these words over and over again until it becomes your own truth.
Finally sitting down to create a budget is going to be hard if this is your first time. But I promise you it will get better over time. Just stick with it. You may need to tweak it several times a month to accommodate your spending and bills, and that’s ok. The categories and how much goes into it are not set in stone. You have complete control over how much and what goes in each of the category. But everything has to total to your income for the month.
While I have been budgeting for years, since I started earning my own income actually, and that was way before I even graduated from college, it still takes work to be disciplined enough not to get overboard. My kids would repeat my response to me every time I say NO to a purchase – “it’s not in the budget”, LOL.
I’ll be honest with you though. As much as my mom has ingrained in me the need to budget, there were a few times in my life when I skipped a budget (gasp!).
I used to do my budget on paper, then I moved to Excel, and then to an app called Every Dollar which I will talk about in another post. When I was doing it on paper and on Excel, it took work to get it sync’d up with everyday purchases so there were a few months I skipped a budget altogether. Let me tell you though, those were exactly the months when our spending was out of control. Those were the months we spent more than we made because we weren’t tracking our spending against a set amount.
Thankfully, because of intentional spending over the years, we’ve built up our emergency and sinking fund to cover overages but I know in my heart that it cannot continue. So I went back to budgeting before it all gets out of hand.
With so many apps available right at our fingertips, we can do our budgets and track our spending with a gadget we always have with us anyway – our phones. It makes budgeting so much easier. Once you get the hang of it, it makes it all effortless. You also see how much more you have left in real time. This is truly a life changer!
To summarize, having a budget:
- Directs your money where to go
- Allows you to pay yourself first
- Gives you an idea of how you spend your hard-earned money
- Makes sure you don’t spend more than you make
- Enables you to pay off debt
- Makes you accountable
- Teaches discipline
- Teaches patience and delayed gratification
In the next post, we’ll discuss HOW to set up a budget and suggest some categories for you so you can be up and running in no time. I’ll also tell you about the app that I use for budgeting. For now, all you need to know and understand is that you need a budget especially if you want to manage your money instead of letting it manage you.
In the comments below, let me know if you have a monthly budget and/or your challenges with it. If you do not have a monthly budget, what’s keeping you from creating one?
