Budgeting sounds like a great plan because so many people are doing it. But without any real understanding of your current financial situation, following a budget just for the sake of following one won’t bring you any true value.
A budget is important because it ensures you have enough money for the things you need when you need them. It will help you achieve financial goals like paying down debt or achieving financial freedom.
Diving in headfirst will work against you. This post will cover 7 Reasons Why Budgeting Is So Important.
Table of Contents
- Why Is It Important?
- Gain Clarity
- Better Management
- More Connected
- Provides Early Warning Signs
- Figure Out Your Savings Rate
- Puts You In Control
- Communicate With Your Significant Other
Before you create a budget, you must understand the importance for having one. While personal reasons like poor money management are obvious, there are much deeper relevant levels beneath the surface that will be uncovered.
Why Is It Important?
Going back to the start, having a budget just to “have a budget” is an alright idea. In the end, it’s much better than not having anything at all. Just know that this notion won’t emphasize any key areas to improve, it’s more like just “checking the box”. The fact that people have a budget can make them feel a certain sense of accomplishment. This doesn’t translate well when actually trying to fix the underlying behaviors that keep them in debt though.
Gain Clarity
Your financial plan will bring to light exactly where your money flows to. You may think that you’re doing a great job with your grocery budget but then realize you’ve spent double (or triple) what your budget actually allowed. This could be said for any one of the spending categories (food, transportation, home, personal). By the way, many people underestimate how much they spend on food each month.
Laying out every transaction on paper provides the accuracy many people lack. They aren’t able to correctly pinpoint why they don’t have money leftover at the end of the month. Without an accurate budget, it’s almost impossible to do so.
Better Management
Measuring your spending against a detailed budget translates to your money being managed better. This stems from having a concrete plan that will compare to the reality of everyday spending. Without a budget, you can be misled to think you’re doing great with money when in fact you’re not.
This is common amongst many people because the feeling of normalcy revolved around their lifestyle. If it isn’t broke – or they don’t know it’s been broken – they won’t seek to fix it. The normal feeling of buying the same cost-ineffective products is just what they do. They haven’t taken the hard look at their finances to make a change.
Sync that urge to manage money better with a carefully planned budget to be one step closer toward financial success. Keep a constant measure against your budget to improve how your money is managed.
More Connected
If you ignore the reality of your spending habits long enough, an enormous distance will form between your current state and the end financial goal you have in mind. This distance is a result of disconnection. Disconnected from simple factors like your monthly take-home pay, recurring payments, or savings rate won’t inch you closer to your goals.
Taking the time to recognize your interaction with money is extremely valuable. Once you’ve followed your budget for some time, you’ll feel rooted to your financial values. If an unexpected expense that doesn’t align with those values comes up, it’ll be easier to say no. It all comes back to the connection you have with your plan. With a plan, you are more connected to your personal finances.
Provides Early Warning Signs
Ever been hit with an emergency and not enough money to cover it? How about being surprised by that annual membership because you forgot? These happen way too often but can be easily avoided. Rather than try to remember everything, use your budget to guide you.
A budget can help build an emergency fund. It will inform you of variable expenses that catch you by surprise. The more detailed it is, the better prepared you are for any circumstance, as long as you’ve actually followed it. You can live a happier life knowing that a crisis won’t steer you off your financial path.
Figure Out Your Savings Rate
Saving is an important factor when it comes to financial independence. The more money you save, the closer you are to retiring early or any dream you hope to achieve. You can save to purchase an asset or a down payment on your forever home. If leaving your 9-to-5 is the goal, then knowing your savings rate is critical. It’s really simple to understand.
1 year of expenses = 1 year of financial independence
As you can see, your yearly expenses determine how close you are to retiring early. Those expenses are evident from the budget you set. Without knowing your budget, you have no idea the weight your expenses carry. At least with a budget, you can direct your attention on adjusting expenses or increasing income.
Puts You In Control
No better feeling than being in the driver seat of your personal finances. A reactive approach towards finance will only set off alarms. Every expense that comes up will feel like a shock. Like a fire that needs to be put out. This is not where you want to be.
Instead, seek a proactive method with your money. Be in control of every dollar – or every penny if it suits your personality – and pioneer yourself towards financial success. In the beginning, you may lack the discipline required for it. The good news is budgeting can be done by anyone.
Communicate With Your Significant Other
Arriving at the point where you understand your personal finance situation will be laborious. If your finances involve someone other than yourself, the difficulty level increases more. They will depend on and commit to your financial plan because, well, you are the one who takes it seriously. They trust you and your judgement.
If you’re reading this, then you are exactly the right person for the job. Being able to frame your financial situation to your loved ones will make the journey easier to progress forward.
You being here defines the type of mindset you have. Possessing this mindset will play a vital role in your family’s success. The purpose you serve is bigger than just yourself.
Conclusion
Your budget is personal to you. It will guide you on a your financial journey and giving you proper warning signs when bills need to be paid or as you approach to a certain personal goal. Remember, there are many other reasons why a budget is important. Start your own today.
What do you like or dislike about budgeting? Is a budget important to you? And why?