Merriam-Webster defines the word “budget” as “the amount of money that is available for, required for or assigned to a particular purpose.” Hearing this word can often make us cringe, but in reality, having and following a budget is one of the most useful tools in personal finance.
If you’re still on the fence, think of it this way. Budgeting is simply a way of setting healthy limits, just like watching what you eat or limiting your exposure to sunlight. The benefits are well worth the effort ― here are some of the most significant ones.
1. Living Within Your Means Instead of Overspending
With a few exceptions, spending money you don’t have almost never leads to anything good. It’s so easy to overspend on certain things, such as “wants” or impulse purchases. Having and following a budget ensures that you are living within your means ― not beyond what you can afford.
Budgeting allows specific amounts of money for different purposes, such as:
- Must-pay expenses like housing, utilities, groceries
- Debt repayment
- Discretionary spending (your “wants”)
That’s not to say you can’t make room in your budget for the things you want, but it does mean that your needs have to be prioritized ahead of your wants. After all, you can’t simply skip a mortgage payment or refuse to buy groceries. Savings and debt repayment should be your next priority, followed by discretionary spending.
2. Making Progress on Short- and Long-Term Financial Goals
Budgeting over time can pay rich dividends, both short-term and in the long run, and an added bonus is you can customize your budget to incorporate whichever financial goals you have in mind.
For example, perhaps you want to save for an upcoming vacation. You can create a budget category to save a set amount of money each month toward the vacation. Using online and mobile banking services, you can even automate these savings by setting up a recurring monthly transfer that automatically moves the money to a separate savings account.
In addition, you can use budgeting over a longer period of time to accomplish long-term financial goals like:
- Saving for retirement
- Paying off debt
- Saving for your children’s education
3. Eliminating Debt
While taking out a loan can be a worthwhile option for purchasing a house or a car, going into debt for other types of reasons, like a shortfall in income or medical expenses, can be painful. That’s why many choose to allow room in their budget to pay down debt over a scheduled period of time.
There are different budgeting methods for paying down debt, depending on what kind of debt it is (simple interest vs. compound interest). Car loans, for example, typically have the same payment amount each month, while the amount you pay toward a credit card each month will usually vary based on the balance.
Either way, budgeting a roughly consistent amount to pay off debt each month can ensure you pay off your debt in a timely manner. If you have extra money to spend in another category of your budget, such as discretionary spending, you can put that surplus toward your debt as well, which will help you pay it off even sooner.
4. Being Well Prepared for Emergencies
You’ve likely heard about the importance of having an emergency fund, and every budget should include setting money aside for some type of savings. While the amount you should have in your emergency fund depends on your unique situation, having at least enough to cover three months of living expenses is a good starting point.
If you don’t have an emergency fund yet, you can start by budgeting a set amount of money each month (again, you can automate this using online and mobile banking). If you can’t contribute a lot, just start small and work your way up as you can.
Once you have an emergency fund available, you can benefit from the peace of mind that you’ll be covered for unexpected expenses. Using cash savings is certainly preferable to taking out a loan or accumulating more debt that you will have to pay off down the road.
5. Improving Your Standard of Living
If you budget correctly and stick with it, the benefits will stack up over time. Not only will you be consistently spending less than you earn, but you will be improving your standard of living ― how “comfortable” you can live in a financial sense ― a little bit each day, month and year.
For example, as you pay off your sources of debt, you will decrease your monthly expenses. You can then take the money you used to spend on your monthly loan payment and inject it elsewhere into your budget, such as adding to your emergency fund or bumping up your retirement contributions.
In addition, as you advance in your career and receive increases in pay over time, you will have extra money to allot to different budget categories. It’s your choice how you want to spend your money, of course, but if you opt to put extra cash toward your short- and long-term financial goals, you’ll come out ahead when the time comes to reap the rewards.
Use Minster Bank’s Online Calculators to Get Started
Want to see how much debt you have or plan out savings goals? With Minster Bank’s easy-to-use online calculators, you can get quick answers to questions like:
- How much should I have in an emergency fund?
- Should I consolidate my debt?
- How long will it take to pay off my credit card?
- And more