A budget is often touted as the most important thing you can have to protect your money. But have you ever wondered why? Here are 10 convincing reasons to use a budget.
1. Pay Your Bills
Having enough cash to pay your bills on time every month is one of the most important reasons to use a budget. This spending plan gives you a bird’s eye view of your cash, letting you know exactly how much money you bring in each month, so you know how much you can afford to spend, too.
If you create and stick to a budget, you can prioritize the things that matter, like rent and utilities instead of unnecessary spending. You won’t find yourself short at the end of the month, unsure of how you’ll pay for groceries.
2. Be Prepared for Nearly Anything
A well-made budget can help you afford more than just your essential bills. It can help you cover the unexpected things in life if you remember to save.
According to the 50-30-20 Budgeting Method, you should save roughly 20 percent of your take-home pay, with some of that going into an emergency fund. Your goal is to save three to six months’ worth of living expenses in this fund.
Why so big? Life can throw you some pretty nasty curveballs, and they usually arrive with a big bill. If you get sick and need expensive tests, a six-month cushion can keep you afloat while you get better.
If you don’t have enough saved before something unexpected comes your way, there are other ways to stay afloat. You can put a doctor’s fee or lab test on a credit card or take out a line of credit if you don’t have room on your cards.
If you choose to rely on a line of credit, the online loan experts at MoneyKey recommend you consider it an essential bill you pay every month. Paying off your balance early may help you reduce what you pay in interest, and it frees up your line of credit for the next emergency.
3. Catch Bad Spending Habits
A budget can help you spot bad spending habits that get in the way of bills and savings. That’s because a budget lays out all your spending, for better or worse. And for most people, they won’t like what they see.
Most budgeting guides recommend you go through the past three months of statements to get a good feel for your average spending.
A backwards look in time will help you spot all the ways you’re inadvertently wasting your money, like parking fines or late fees. It also makes you aware of all the little ways you’re spending money on things you don’t need.
Are you paying for Netflix, Prime Video, HBO Max, Disney+, and Hulu on top of cable every month? Although each subscription may be under $15, they add up! The average person spends $273 on monthly streaming subscriptions.
4. Get out of Debt
Balancing a budget becomes a lot easier when you don’t have to shell out big bucks on debt every month. You’ll free up a lot of money to go towards savings and fun things once you pay back all your short term personal loans, auto loans, and credit card and line of credit bills.
If you aren’t sure how to pay off these debts, follow the avalanche method. This debt-paying strategy has you roll in all your extra cash into the debt with the highest interest rate while simultaneously covering the minimum payments for all your other loans.
The avalanche method gives you a course of action and helps you reduce what you pay in interest compared to other debt-paying strategies.
5. Inflation is Here to Stay
While inflation has dropped a tiny bit from its record-breaking peak this summer, it won’t be popping any time soon. Economists expect inflation to remain higher than normal far into 2023, which means everything will cost more for another year at least.
Groceries, gas, and utilities — with everything costing a little bit more, these essentials are taking up more of your paycheck. A budget can help you keep track of these increases and prioritize enough cash to cover them.
6. Shrinkflation is a Growing Concern
Shrinkflation is an ugly cousin of inflation that may be behind the financial turmoil you’re feeling today. It describes how some companies reduce the size or quantity of their goods while keeping the price the same.
In other words, shrinkflation is the reason why you’re still paying the same $3 for a bag of chips half its usual size. A budget can help you make ends meet when you’re paying the same for less.
7. Have Some Fun
A budget isn’t just for serious financial jobs like paying bills and saving money. A well-balanced budget helps you afford the fun things in life.
Remember that 50-30-20 Budgeting Method mentioned earlier? According to this rule, you should aim to use 30% of your take-home pay on frills you don’t need to survive to make your life a lot more enjoyable.
8. A Recession May Be on its Way
It’s easy to pay bills, save money, and have a little bit of fun when the economy is doing well. But when it crashes, everything gets a little bit harder. You could face significant difficulties if a recession hits your industry hard in 2023, and you lose your job.
Having a budget can help you smooth over these rough patches. But more importantly, a budget sets you up with an emergency fund that provides a cash cushion in case you’re affected negatively by a recession.
9. Wage Stagnation
Despite the increased cost of living, most wages aren’t growing at a comparable rate. While you might get a raise every year, it’s probably not equivalent to the inflation rate. As a result, you’re earning less at a time when you’re spending more.
A budget can help you stretch your money when your earnings-to-spending is out of balance. But when that fails, you should consider what you need to do to earn more — whether it’s by changing careers or adding a side hustle.
10. Retire on Time
Retirement may feel like a far-off fantasy, but your golden years will be here before you know it. It will be easier to retire on time (around 65, if you’re like most people) if you prepare for this far in advance.
Financial advisors recommend getting a 401(k) or similar retirement fund as early as you can and opting for an employer matching. Your savings will earn greater interest in these accounts over the decades.
And there you have it — 10 solid reasons why you need a budget today!