Are you working your tail off but have nothing to show for it at the end of each month? Are you struggling to pay your monthly bills? Do you have spending patterns that you are not proud of? Do money worries keep you up at night?
The post is about how budgeting will answer this and many other questions.
First, lets define what budgeting is? According to consumer.gov definition: a budget is a plan you write down to decide how you will spend your money each month. A budget helps you make sure you will have enough money every month.
Next, lets talk about the key benefits of having a budget and budgeting overall.
Know your expenses, gain a piece of mind
One of the key advantages of having a budget is the budgeting process itself. The process will help you understand your true monthly expenses and expose your spending habits. Are you eating out too much? Do you buy on amazon too often? Is your water bills are really twice higher in the summer months?
Your budgeting process will reveal many things about your spending that will equip you with the data you need to gain clarity about the next steps. Knowing what you have, how much you spend, and where your money is going will make you feel more in control over your finances and give you confidence for the next steps.
Pay off your debt faster
Your budget is a tool that will also significantly improve your chances to pay off your debt in a much shorter timeframe. So instead of paying just a minimum on your credit card statement, you might be able to pay an extra $100 on towards your principal balance, closing student loans, car loans, credit cards, or mortgage in no time. The act of reducing your debt faster will save thousands of dollars in interest charges, improve your credit score, and bring you closer to your FIRE goals.
Build your emergency fund
Most of us do not plan for sudden illness, car accident, or a layoff. The reality is those situations do happen every day, and they may have harsh financial consequences for an individual or a family. It is advisable to have at least 3-6 months of “rainy day” or emergency fund set aside in the liquid cash account. Budgeting will help to build the emergency fund. Little by little, you will get into the habit of having a comfortable cushion, making you more financially resilient and avoiding unwanted debt during your next chrisis.
Build your future
When we know how expenses are distributed every month, it becomes clear how we might start planning for your long-term goals. House purchase, kid college expenses, and retirement come with a price tag. Your budget will illuminate opportunities to begin incorporating activities for those long-term financial events into your budget and prepare for them in advance.
I met countless people who argued with me that budgeting is only for folks who do not have any money and need to minimize their spending to meet their monthly obligations. I was told, If you have millions, why budget? I also met a few folks that believe that if they make minimum wage, there is no need to budget since their income is so low. The truth is, budgeting is for everyone, whether you work for an hourly wage or are a millionaire.
In our next post, we will review the basics and how to get started with your budgeting practices.