The Importance of Budgeting: Top 5 Reasons

Last Updated by Neiko Johnson on 
August 14, 2021
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The Importance of Budgeting Top 5 Reason

Are you interested in learning the importance of budgeting?

A basic definition of a budget can make budgeting sound boring and restrictive. However, we view a budget as giving yourself the freedom to spend on whatever things you care about and value.

Changing your perspective about budgeting will allow you to approach your budget with a positive mindset.

Living on a detailed budget can help you have better money management skills. You will learn how to pay off debt, invest for retirement, save for special occasions like traveling or Christmas, and get ready to buy your first home.

Most importantly, budgets allow you to have insight into your income and expenses. You will know exactly how much money you spend each month on your specific categories.

You may be struggling with sticking to your budget or not know where to start.

You're not alone. Most people experience a lot of financial stress from student loans, credit card debt, car loans, or even rent payments.

A budget is important but there are disadvantages and advantages just like anything else.

The disadvantages of budgeting include:

  • Learning how to live on less than you make can be hard at the beginning.
  • You may feel like you're restricted from spending money.
  • You will have to say no to some things you want to do or buy.

The advantages of budgeting include:

  • Once you get a good routine, you will feel confident about budgeting each month and that you have more control over your money.
  • You will be able to save money more consistently.
  • Your debt balances will start to decrease – you will have a clearer vision for your debt-free date.
  • You will have less financial stress.
  • As your budgeting skills improve, you will want to start setting other financial goals.

1. Budgeting Helps You Manage Your Money

Most importantly, budgeting gives you the confidence to manage your money effectively. You will have the freedom to spend your money as you'd like and nothing can hold you back.

In fact, living without a budget makes it harder to fully understand what you can spend your money on and what you shouldn't spend your money on.

A budget gives you clarity for reaching your financial goals.

Before we started budgeting, we would spend money on things we didn't need to. Living without a budget is part of the reason we had so much debt at the beginning of our marriage.

We weren't intentional with our money and it led to us making bad decisions such as car loans, credit card debt, and spending money on vacations.

As we got better with budgeting and paying attention to where our money was going, it allowed us to keep more money in our pocket to put towards debt and other financial goals.

Above all, eating out is a spending category that many people struggle with. Some people can spend hundreds of dollars on eating out and not even realize it.

It may be insignificant when you spend $10 here and there but it adds up.

However, we are all about still enjoying life when living frugally. The amount of money for enjoyment should be a small amount when you're trying to reach financial goals.

This approach will make sure that your enjoyment of spending money won't hurt your overall budget. You have to decide what amount of money you're comfortable with enjoying and won't impact you in the long run.

Most importantly, budgeting is important if you want to stay on track with reading your financial goals and controlling your spending habits.

2. Budgeting Provides The Freedom To Spend

The importance of budgeting is something that every person needs to focus on. When you track your money it allows you to spend within your limits.

In fact, it all starts with understanding where you spend your money. A budget allows you to spend with permission and shouldn't be viewed as restrictive.

At the beginning of each month, you should take the time to create a detailed budget.

The steps to create a detailed budget are:

  • Calculate your after-tax income
  • Calculate your monthly expenses
  • Choose a budgeting plan
  • Write it out and commit to it (your spouse too! If applicable)
  • Reconcile and revise

These steps are critical and help you have freedom with your money. When you emphasize the importance of budgeting it will help you worry less and enjoy things that you care about. You get to decide how much money you spend in each category and that's the ultimate freedom of budgeting. Most importantly, you can spend guilt-free because you budgeted correctly at the beginning of the month. Important to note, budgeting is not about limiting enjoyment in your life, it's all about having a plan and knowing exactly where you want to spend money. Once you find freedom by focusing on the importance of budgeting, you have to build a key foundational aspect of money management. Ultimately, you will enjoy your financial journey a lot more when you have good budgeting skills.

3. Having a Budget Helps You Get Out of Debt

One of the biggest reasons we were able to pay off $240,000 of debt in just 27 months is because we focused on the importance of budgeting.

Being in a pile of debt can prolong your journey to building wealth. We talk about debt a lot on our website and believe it's very important to get out of debt and avoid any further debt.

By focusing on the importance of budgeting, it will allow you to save more money and put extra towards your debt payments. The faster path to getting out of debt is by paying extra each month to your debt totals.

We were able to do this by increasing our income. Ultimately, you can increase your income through budgeting when you cut unnecessary expenses and limit spending. You find extra cash after you decide what not to spend your money on.

Above all, it's critical to not hurt your budget by being in so much debt that you're not able to pay your regular living expenses.

Your budget is the path to paying off debt fast so you can save for investing and hitting other financial goals such as buying your first house.

Related reading to getting out of debt:

4. Creating a Budget Helps You Stay Organized

One important thing budgeting helps with is being organized. Being disorganized when it comes to your money will not help you reach your financial goals.

Above all, you must be in control of your money and that requires organization skills. The longer you go without a budget, the easier it will become to stay unorganized.

Your money will continue to slip through your hands and you won't have any idea where the money is going.

In fact, you probably have debt payments, monthly bills, and other expenses that you aren't tracking if you're living without a budget.

Ultimately, it can lead to bad financial decisions by simply being unorganized. It's hard being organized but just as hard being unorganized. So, go ahead and choose your hard.

We recommend you focus on the importance of budgeting so you can get your finances in order and have more control of your financial future.

Creating a budget doesn't have to be hard. You can try a few different budgeting methods and choose what works for you. We use the zero-based budgeting method because it helps us put extra money towards certain financial goals.

However, personal finance is personal and it's all about doing what works best for you.

Related reading: Budgeting 101: How To Create A Budget

5. Save for an Emergency by Budgeting

Understanding the importance of budgeting can help you plan for emergencies. It's important to remember that everyone will experience an emergency at some point. It's not if it's when so you must be prepared.

You won't be ready for unexpected life events such as medical bills or car trouble if you don't have an emergency fund.

Living without an emergency fund can set you back months because you may rely on debt to take care of the emergency.

In general, our rule of thumb is to have 1-3 months of expenses while paying off debt and 3-6 months once you're debt-free minus your mortgage.

The reason for the range is to provide you with the flexibility to decide what you're comfortable with. Some people are comfortable having a smaller emergency fund so they can put more money towards other financial goals.

But, some people want a bigger emergency fund because their job may not be as secure as they would like it to be.

Ultimately, it's all about doing what works best for your personal situation that will lead to success.

When saving for an emergency fund, it's important to put that money in a separate account than your daily checking account. This will remove the temptation to spend that money on anything other than an emergency.

An emergency is an unexpected life event. Buying a new TV because it's on sale is not an emergency.

A great option for your emergency fund is a high-yield savings account. We recommend CIT Bank because they offer competitive and higher rates than the traditional bank you may have.

We love online-only banks because they offer better customer service and by not having a physical location they offer better rates.

Click here to open your high-yield savings account with CIT Bank today.

The Best Tools for Budgeting

You need helpful tools when it comes to budgeting. If you like to use automation or your mobile device for staying organized then here are a few good budgeting apps to try:

We use the EveryDollar budgeting app because it suits our zero-based budgeting method. But, you should always try different tools and choose what you like the most. Choosing the one you like most, will keep you engaged and interested to use the tool. On the other hand, when you use tools that don't interest you, it can lead to distractions and not being as organized. Related reading:

Final Thoughts - The Importance of Budgeting

Creating and using a detailed budget doesn't have to be frustrating or confusing. Certainly, it will require sacrifice early on but once you get the hang of it, you will get more comfortable.

And the best thing about the importance of budgeting is that you will gain a sense of better control over your money. That in itself is worth using a budget for your finances.

We have discovered that the more we focus on our money, the better decisions we make for our financial future. It's not only about making money. You have to have a plan and live by that plan.

Do you live on a detailed budget? Why or why not?

Article written by Neiko Johnson
Neiko is a personal finance expert and Co-founder of Secret to Finance. Along with his wife Alexis, they learned how to get out of debt and paid off $400,000 in 4 years.

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