A budget is a plan for how you'll direct your income to cover your expenses, afford your wants and set aside money for the future. Not only can a budget help you stay afloat now, but it can help you build financial stability for the future.
When you create a budget, you have the opportunity to get clear on where your money is going and look for areas you may want to change. Here are four reasons why you should budget.
1. Budgeting Helps You Avoid Overspending
Without a budget, it can be easy to lose track of how much you're spending on what. Dining out, shopping online, going to events with friends—splurges big and small can add up to drain your bank account.
With a budget, you can get a clear sense of how much you can afford to spend in the different areas of your life. After setting aside the funds needed to cover your housing payment and bills, you can allocate cash toward other essentials like food and toiletries.
Then, you can determine how much you'll leave yourself for discretionary spending. By setting spending limits, you can avoid overdrawing your bank account or missing bill payments.
2. Budgeting Brings Your Goals Within Reach
A budget can help you reach your savings goals by giving you more control over your money. Without a solid sense of how much you spend compared to how much you earn, creating new, attainable goals can feel overwhelming or uncertain.
But with a budget, you can plan ahead for how much you'll set aside from each paycheck. Then, you can track your transactions using a budgeting app to combat overspending and ensure you don't eat into the funds you planned to save.
One way to budget for saving is with the 50/30/20 budget plan, which has you set aside half of your net pay to housing, bills and other essentials and 30% toward discretionary spending. The 20% that's leftover goes into savings and debt repayment.
For example, say your take-home pay is $700 a week. If you planned to put away 20%, that would equal $140. To make sure you're paying yourself first, you could set up an automatic transfer each payday into a high-yield savings account. Or, you could see if your employer allows you to split up your direct deposit so that a portion of your pay goes directly into savings.
Find High-Yield Savings Accounts
3. Budgeting Can Keep You out of Debt
Impulse spending is a real risk when you have easy access to credit, and overspending on credit cards can leave you with a balance you can't pay off. But carrying a balance month to month can mean forking over money to high interest rates. Once you're in debt, it's easy to spiral deeper, and getting out can become challenging.
By using a budget with your credit card, you can make sure it works for you rather than against you. And if you're already carrying credit card debt or high-interest loans, you can get back on track by creating a debt repayment plan and budget. Remember that paying more than the minimum on your debts can help you save substantial amounts of money on interest long term.
4. Budgeting Can Help You Prep for Emergencies
An emergency fund is money that you set aside to cover unexpected expenses or to support yourself in the event that you face a reduction in income. Having some funds tucked away for a rainy day is a big part of feeling financially secure, but saving for an emergency can be tough if you're not keeping your spending in check.
With a budget, you can ensure you're prioritizing putting some money away for a rainy day. And beyond that, budgeting can give you insight about how much you should be saving for an emergency in the first place.
Experts recommend setting aside three to six months' worth of funds for basic expenses. To see how much you need to save, tally up how much you spend on housing, bills, minimum debt payments, basic groceries and the like. You can think of this as your bare-bones budget.
To build your emergency fund, multiply your bare-bones total expenses by the number of months you want to stash away. You could start by focusing on just one month. Then, keep growing your fund from there.
The Bottom Line
A budget is the foundation of your financial life—it's there to help you build your spending and saving habits. It can help you direct your income toward your needs and wants, and steer clear of overspending and consumer debt.
If you're motivated to start budgeting but aren't sure where to start, learn about different types of budgets for every spending personality. For example, you might want a budget that puts you in control, or a budget that requires very little effort. When you find yourself going off course with your spending or losing interest in budgeting, spicing things up with a new budget app or fresh saving goal can help you stay on track.