If you’re in debt or you have no idea where your money is going every month, you definitely need a budget. In fact, when it comes to personal finance, a budget is the most basic and effective tool that you must have in your arsenal – and you must use it.
Many people look at a budget as something ‘restrictive’. They feel that it doesn’t allow them to live their full life in a spontaneous manner. Very often, they end up broke and mired in debt.
The good news is that a budget gives you freedom. After all, you’re the one creating it… and with the right planning and execution, you can come out of debt, save up a nest egg and still have money to enjoy life. It may take a bit of time, but you’ll get there.
Now let’s look at a few other benefits of having a budget…
- It relieves financial anxiety
When you’re in debt and you have bills and numbers rolling around in your head constantly, it’s easy to get overwhelmed. The best way to overcome this problem will be to write down all the details down to the last penny on a piece of paper.
Now you have exact numbers to look at. You’ll know which credit cards have the highest interest rates, which one has the highest outstanding balance and so on.
You can now create a budget based on your current income and see how to pay up your debt while still saving a small portion of your income. It’s imperative that you rectify your dire finances with a budget.
- It prevents financial stagnancy
If you’ve been in debt for ages and just seem to get by from month to month by paying the minimum amount on your bills but you’re not progressing, a budget will show you what you need to do.
The same applies for saving your money. If you have no money to save at the end of each month, a budget will show you where you’re leaking money and you can trim some expenses so that you have funds to save.
- It allocates your resources effectively
Too often, people focus more on settling debt and paying up bills than saving for themselves. While you’ll need to pay off the debt and bills, a budget will show you how to save anywhere from $25 to $50 extra.
For example, that might mean paying more than the minimum sum for just one credit card, and just the minimum for the other 2 you own. The extra money can be saved.
Your savings will give you confidence and some security. The card companies can wait for a while and be happy with the minimum.
Once you pay off one card, you can use the usual payments for that card to pay off the next and so on. In this way, you’ll gradually settle off your debt and STILL have savings that will help you during a rainy day.
A budget will guide you here better than any other tool will.
- Keeps track of your spending
This is a big one. What gets measured, gets managed… and that applies here.
For the first 4-8 weeks, depending on how dire your financial situation is, you’ll want to write down every single expense you incur.
You’ll want to see where you’re frittering your money away. Impulse purchases, unnecessary subscriptions, etc. can all be tracked when you write them down.
Look at your spending habits and decide where you’ll trim your expenses. For example, if you’re subscribed to cable channels you barely watch, cancel them and save yourself the expense.
Stop buying expensive coffee and make your own instead. Cook for yourself instead of eating out.
With a budget, you’ll be able to see where your money is going and how you can hold on to more of it – and allocate it better.
- Holds you accountable to your financial goals
If you have a goal to save 3-6 months’ worth of income in an emergency fund within the course of a year, your budget will show you exactly how much you need to be saving each month.
As long as you follow the budget, you’ll reach your financial goal. If you fall short, you know you’ll need to catch up. If you can save more, you know you’ll reach your goal faster.
A budget will show you exactly how you’re performing and make you stay true to your goals.
By now you’ll realize that a budget not only helps you pay off debt faster, but it organizes your spending, helps you focus on your money goals, increases your savings and investments and paves the way to a comfortable retirement. You have everything to gain and nothing to lose by having a budget. Go ahead and make one for yourself today.