One of the most important life lessons is to learn how to manage what we spend a third of our life making and that is money. Managing money is very crucial if you want to be able to have a good financial life.
However, most people are reluctant to start making a budget because they think that a budget is very restrictive and that they will not be able to do or get the things that they want to buy. This is not the case at all. Instead, a budget will be the best servant.
In this article, I am going to tell you the five reasons why you need a budget. Do you know how much money you are going to make this month? Do you know how much money you are going to make this year? If you know the answers to these questions then you already do budgeting because budgeting starts with knowing how much you make.
Let’s make a budget before I tell you the importance of budgeting. I have to flip it. Before you read the five reasons why you need one let us make one. Then after you have made one (which will take you a max of 15 minutes), we’ll go through why you need one.
Chances are if you are reading this article you are not driving or farming or bungee jumping or swimming or dancing. If you are sitting down reading this article please stand up right now and go grab a pen and a piece of paper, or open up Microsoft Excel, Word or PowerPoint.
We are going to make a budget in less than 15 minutes. Here we go:
You will need: how much money do you make?
Income Amount (aka. Money you make) = _____________
Here’s an example of a sample budget for a single person earning $3,000 per month after tax (also called net pay/income/salary/earnings (mmm easy things making them complicated) on your pay cheque)
INCOME:
Salary – $3,000
EXPENSES:
Rent – $1,000
Car payment – $250
Gas – $100
Groceries – $400
Utilities – $150
Entertainment – $100
Dining out – $150
Phone – $100
Parking -$ 60
Savings – $390
TOTAL EXPENSES: $2,700
REMAINING: $300
YOU ARE DONE! CONGRATULATIONS!
Here are the five reasons why budgeting is important:
1. It makes you aware of your spending habits
Are you shocked after you made the budget? The first time I made a budget I was shocked at how much money I spent on different things, especially on the rent, gas, groceries and entertainment. The moment you figure this out it is going to be the biggest realization, because when you know about something then you can do something about it and if you don’t know anything then you won’t be able to do anything about it. Arguably this is the most important part of making a budget; it makes you aware of your spending habits. This is very important. You might not even read the next four points but just knowing where you spend your money puts you in a certain mindset and allows you to be able to cut back on some of the things that you were overspending on. For example, I realized that my internet bill was just way outside the roof and I had to renegotiate my internet bill with my company and it didn’t work. I had to change my internet provider and it saved me a good $100 per month.
Please leave in the comments how much money you have saved after you wrote down your budget.
2. It makes you very proactive and able to prepare for unforeseen expenses
We have all been there where you have had a tire puncture or something breaks in your house or you get a large bill and you don’t have money to be able to cover it and that’s where a budget comes in. So when you make a budget you’re going to prepare for these unforeseen expenses that otherwise you’ll be in trouble if you don’t have savings. I would say this is huge because it takes away so much stress from your life knowing that if for example, you face an unforeseen cost of $500 or $1000, you know you have it saved. In the budgeting example above, you will be able to save $390 a month, which means that in about 4 months you will have enough to cover any unexpected cost of $1,000 or less. This is also what some financial planners call an emergency fund.
3. It alleviates lots of stress and anxiety
Did you know that in a stress survey conducted in the United States, 72% of respondents reported feeling more stressed about money than anything else? For some people, money ranked higher than some of the other biggest causes of stress like the death of a loved one, divorce and a major illness or injury.
Unexpected events and expenses cause lots of stress and anxiety and having a budget can significantly diminish feeling worried. A budget aids in freeing up your mental space knowing that you have most of the things covered.
4. It assists you to reach your financial goals
Whether you plan to travel the world, save for a house, pay off that student debt, buy a car or move to a new location these are all possible with a budget. If you don’t have a budget most of these things might not come to fruition. You might get some of them accomplished but most of them will not happen. It is very easy to get sidetracked spending money on different things that do not align with your goals but with the budget, you can stick to your plans and achieve them.
5. It makes you very realistic with things
I know this one has happened to all of us; you go to a place and you try to buy something and all of a sudden you cannot afford it. How exciting is that? We all know the feeling, of course, and it’s not exciting. Then you plan to go find where you can get the money and you realize, hey I don’t have any money, and then you start thinking maybe I should use… (drum roll please)… a credit card. All of a sudden you are spending $200 on a new pair of shoes and then you are having serious trouble getting into bad debt. A budget will help you avoid these kinds of debts and it will make you aware that you cannot spend money that you do not have.
The budget that you have created above is the one that is going to help you to achieve so many of your goals. I am aware that I have left off a couple of things on my budget but you get the idea that those are the things that you need. Please add maybe four or five more things to the expense section and that should be it. It’s that simple.
A completed budget is different depending on your lifestyle and how much money you make. You still must stick to the budget you created!