Why You Need a Personal Budget
There’s nothing quite like the feeling of receiving a large bill and being able to pay it without worry because you have the money saved up.
Money may not be able to buy you happiness. But it sure can buy the foundations of happiness in the form of security, comfort, and confidence. When you have enough cash in the bank, you can usually sleep easier at night. The alternative (living paycheck to paycheck) most often leads to feelings of stress and anxiety.
No matter where you are right now, you can improve your financial situation by simply making a budget and sticking to it.
This post explores why you need a budget and offers some tips on how to manage one.
Tips for budgeting
Budgeting doesn’t have to be like pulling teeth.
In fact, as time goes on, you will probably enjoy gaining more visibility and control over your finances. It’s a rewarding feeling knowing that your income is working as hard as possible and that you’re practicing sound financial strategy.
Revisit your budget on a regular basis
Budgets shouldn’t be set in stone. Over time, your financial needs are going to change.
That being the case, it’s better to be flexible about where you put your money.
For example, suppose you have an expensive month coming up. You’re going to a friend’s wedding, requiring you to buy a tuxedo or dress, a gift, rounds of drinks, and maybe even a hotel room or plane ticket for a bachelor or bachelorette party — to name just a few expenses. Trying to meet your savings goals is no excuse for skipping out on a life event.
The best thing to do is take a fresh look at your budget at the beginning of each month and ask whether it aligns with reality. You may need to scale back on savings from time to time or reduce your household budget to make ends meet. Chances are you can find some wiggle room in your budget to make things work.
Try a zero-based budget
One of the principles of budgeting is that every dollar counts. It’s important to look at every dollar that comes in and direct it to the right area at the beginning of the month. This strategy is called a zero-based budget.
In short, a zero-based budget is one where your total take-home pay minus your expenses comes out to zero. Simply determine your total income, list all your expenses, and give every dollar a destination — like paying down debt, funding a savings account, and so on. Then, track your spending on a daily basis to make sure you stick to your plan.
Set up autopayments
Take a look at your recurring monthly expenses and consider automating them.
This will accomplish a few things. First, you’ll never miss a payment and have an important service shut off or deal with a late fee.
Also, since the money automatically transfers out of your account, you won’t even miss it. Many people find it easier to autopay bills instead of manually going through the process of giving away money every month.
Use a budgeting app
There are apps for everything these days, and apps that help you with budgeting are no exception. In fact, several apps offer useful budgeting tools that can help with cash allocation and managing your spending habits, to name just a few benefits.
Some of the best apps on the market include Mint and You Need a Budget (YNAB). Look around and find an app or template that you enjoy using for on-the-go mobile budgeting.
After all, you’re on your smartphone constantly. You may as well use it to manage your finances.
What it’s like living with a monthly budget
Living on a budget may seem scary if you’re used to spending cash all the time without any restrictions. But once you embrace financial planning, you may find that you actually enjoy it. You’re also more likely to end up with extra money in the bank when you need it.
At a very basic level, budgets eliminate chaos from your finances. It involves organizing your income into various buckets and allocating money into them every time you get paid.
For example, your budget may resemble the following structure:
- Food (20%)
- Household expenses (15%)
- Housing (20%)
- Short, medium, long-term, and retirement savings (15%)
- Investment accounts and savings (10%)
- Debt repayment (e.g., car payments or student loans) (15%)
- Travel and entertainment (5%)
Without budgeting, you could easily wind up spending 20% to 30% of your monthly income on a category like travel and entertainment if you’re not careful. As a result, you might have less money on hand for basic necessities or savings, which is a situation that could lead to financial ruin.
Of course, you can deviate from a budget from time to time, which we’ll explore in a bit. However, by sticking to a plan, it’s much easier to save money and plan for both expected and unexpected expenses.
Top reasons you need personal budgeting
There are many reasons for engaging in personal budgeting and money management. You might want to build up your bank account, improve your credit score, or increase your net worth, for example.
Here are some other reasons why personal budgeting is so important.
1. Live within your means
Without a budget, it’s very easy to live outside of your means — spending too much of your income and racking up large bills with no way of paying them.
Having a budget is like driving down a road with financial guardrails. It limits your spending and helps you come to terms with the fact that you don’t have an endless amount of money.
2. Avoid credit card debt
If you’re using credit cards without a budget, you’re asking for trouble.
It’s very easy to fall into a habit of overspending with credit cards, racking up charges, and thinking you’ll pay them off at the end of the month — only to have to carry a balance or dip into savings. If you do this consistently, you could wind up in an interest-accruing debt hole that you can’t dig out of.
By sticking to a budget and setting limits on credit card spending, you can avoid falling into debt, and benefit from credit card points instead of falling behind on payments.
3. Invest more aggressively
The general rule of thumb with investing is to be as aggressive as possible when you’re young to take full advantage of the stock market. Yet this is not easy to do when your budget is all over the place. If you’re not consistent about investing, you could fall behind in your short-, medium-, and long-term retirement investing goals.
By setting a budget, you can allocate a portion of each paycheck to a brokerage account or a tax-free retirement account — like a 401(k) or an individual retirement account (IRA). If you do this consistently for several years, you can build up over six figures worth of retirement savings with very little effort.
4. Prepare for emergencies
You never know when a financial emergency is going to hit. You may lose your job or get into a car accident and have to cover an unexpected bill.
By budgeting, you can build an emergency fund and make sure you have enough money in the bank to cover living expenses and absorb surprise expenses when they happen.
How much should you have in an emergency fund?
An emergency fund should include enough money to cover at least six months of living expenses and get you through a potentially difficult financial situation.
This money can cover things like groceries, your rent or mortgage, student loans, and utilities — fundamental expenses that you can’t avoid if your income stops rolling in.
5. Attain financial freedom
In the long run, you can obtain financial freedom by budgeting your money and managing where your dollars go. Instead of spending freely, you can manage your income and build a solid financial foundation for yourself.
By taking this approach, you’ll ultimately be able to have more fun while worrying less about making ends meet. Budgeting can allow your savings to grow — and your debt to remain at a manageable level. It also allows you to set long-term financial goals and steadily work toward them.
Frequently Asked Questions
What are fixed vs. variable expenses?
There are two types of expenses in a budget: fixed expenses and variable expenses.
A fixed expense is something like a gym membership, which doesn’t change each month. With the exception of a change in policy, you’ll typically pay the same amount each cycle.
A variable expense changes every month. For example, electricity and water bills are usually variable expenses because they tend to fluctuate depending on usage and rates.
For the best results, make sure that your budget accounts for unexpected spikes in variable expenses.
Should I use a personal finance advisor?
Using a personal finance advisor can be a great way to help prioritize expenses and form a budget — especially when you get into things like saving and investing. A personal finance advisor can help you determine where to allocate money for maximum growth.
You can either arrange a consultation with an advisor or have one on retainer to manage your portfolio and keep you on track. It depends on your personal situation and your overall financial goals. Just make sure you include those fees in your budget!
Is budgeting important?
Budgeting is one of the most important things you can do to manage your personal finances.
Some people wrongly believe that you don’t need budgeting as you make more money. As it turns out, budgeting gets even more important as you start to earn more in your career. You need to be extra careful about tracking how your money is flowing in and out of your account on a monthly basis if you want to achieve long-term financial independence.
On the other hand, if you don’t keep a budget, you’ll wind up wondering where all your money went at the end of every month.
What should I do before starting a budget?
Before starting a budget, you should take a close look at your financial situation. If you have credit card debt, add it all up in a spreadsheet. Make a list of all your bills and average expenses, too. This part can be eye-opening, to be sure. But it’s the only way to build a budget.
The next step is to look for things that you can remove from your budget — like the streaming video service you never use or the takeout food that you order two to three nights per week. When you scrutinize your cash outflows, chances are you’ll find a few things to eliminate.
The Bottom Line
At the end of the day, forming a budget is the best way to manage your finances. You should have a budget regardless of what you do — or how much money you bring in.
By following a budget, you’ll be able to reduce debt, pay your bills more easily, and stay on track with your saving and investment goals.
Following a budget may seem intimidating at first. But it’s important to remember that it’s for your own good. As time goes on, you can revisit your budget and make adjustments to make it easier.
Here’s to forming the best personal budgeting strategy for your unique financial situation.