When we hear the word “budget”, the first words that come to our mind are sacrifice and misery. We assume budgeting means giving up all the things we love. But that’s not true. In fact, budgeting makes your life better in many ways. That’s because when you track your money and set reasonable spending limits, you can get ahead of your money instead of being trapped in a cycle of debt and desperation. By understanding where your money goes now and getting intentional about how it will be used moving forward, you can spend less than you make and build financial stability so that fear, worry, and stress over money won’t have a firm grip on you. This article will highlight why budgeting is so important for your personal finances and provide some helpful tips on how to create one yourself.
Why is budgeting important? What does the science say?
Research on budget planning is currently rather limited, and the current body of scientific research does not address this issue. Personal finances, setting goals, and financial advice are the primary subjects for most of the available papers. However, there is an interesting research paper conducted at The Eastern Mediterranean University, Famagusta, North Cyprus, titled: Importance of Creating a Personal Budget among Millenials, their Perception and Satisfaction. You can download this paper here, which is a great read. In this study, Millenials were asked about their thoughts about creating their own budget. They surveyed 161 young people and they found out that most of them acknowledge the importance of building a budget. Building a budget is a critical component of their lives. In other words: they already know that budgeting is important. And probably, at a deeper psychological level, you know it as well, and you just want to hear more encouraging reasons, and, why not: to get some extra motivation to do it while on the way. So, let’s get to it:
8 reasons why budgeting is important:
- Budgeting is important because it completely changed other people’s lives (for the better). Here are a few concrete examples:
-
- It changed Allison’s life after she decided to get her finances under control back in January 2019
- It changed Rachel’s life, the author of the Money Hacking Mama blog. Here you can read more about her experience and find out why budget planning was an important part of her journey. She includes some specific details, even screenshots of her net worth from 2015 to 2019.
- It changed Latasha’s life, her actual words: Budgeting Saved Me: How Budgeting Changed My Life. She talks about her journey and gives some step-by-step advice for those who want to tackle budgeting. It is important to get advice from people who have experience in budgeting, and Latasha is certainly one of them.
- There are way more examples that clearly demonstrate the importance of budgeting; I’ll give you one more, and then I’ll teach you how to find more if you still need motivation and confidence. I believe that concrete examples of people that have already benefitted from budgeting are the best at conveying the importance of budgeting. The next example is a video. It is about how Kaila saved 10,000 in 3 months with budgeting. To find out more examples like hers, do a search on YouTube for “how budgeting helped me”, and you will find plenty.
-
- Budgeting is important because it reduces stress and anxiety in your life. When you have a plan for your finances, it can help you feel more in control and less anxious about money. And when you have a clear understanding of your income and expenses, it can help to ease any worries you may have about making ends meet. There is this interesting example in which Dave Ramsey (who is a popular American radio personality, author, and businessman who specializes in helping people get out of debt) talks with one of his show’s listeners about how to deal with anxiety when paying off debt. And if you want more examples that are not from experts but everyday people like you and me, then you should watch this video about how Ryan uses a budgeting tool to minimize his overwhelm and anxiety. It’s important to know that if you find that your anxiety around money is causing you significant stress, then it may be worth seeking out professional help. Dealing with it is not an easy job.
- Budgeting is important because it will change the way you see and interact with money. When you’re on a budget, you have to be much more mindful of every penny you spend. You start to think about whether or not you really need something before you buy it, and you become much more aware of how much things actually cost. Some people find that budgeting makes them feel more restricted, while others find that it helps them save money and better manage their finances. Budgeting helps you see money in a new way because you will have new information brought forward, information that was not visible before. This can make you more aware of your spending habits and help you to curb any unnecessary spending.
- Budgeting is important because it will help you stay out of debt. By using a budget, you will be able to see if a certain expense will lead you into debt. You will probably hesitate to make it if you know. Maybe it’s not worth it. It’s our job to control our urges when it comes to taking out loans. Because they look so attractive, you must know how much money you have and how much further you can stretch it.
- Budgeting is important because it will make you more accountable. Budgeting is a simple and straightforward method of tracking your money usage. You may employ your budget as a tool to motivate yourself to be more responsible. The first step in your journey toward self-accountability is to stop blaming outside factors for your financial problems. You will be able to identify the real causes of your problems. For example, many people who have obsessive spending tendencies might not be aware of them until they see all of their expenditures recorded for a few consecutive months.
- Budgeting is important because it can help you stop living paycheck to paycheck. The best way to stop living paycheck to paycheck is to start budgeting and saving money. You need to figure out how much money you need to live each month and then start setting aside money each month to cover those costs. Once you have a cushion of savings, you can start working on paying off debt and building up your financial security. It takes discipline and perseverance, but if you’re willing to make some changes in your spending habits, you can get out of the paycheck-to-paycheck cycle. If you are in this case, The Budget Mom has a very good example of how budgeting can work for a person living paycheck to paycheck. She goes through the whole process step by step.
- Budgeting is important because it will help you save more. For some people, saving money without budgeting is possible because they have a good handle on their finances and know exactly where their money is going each month. They may have a good income and/or be very mindful of their spending, so they don’t need to budget in order to save. However, there are plenty of people that need to budget in order to save because their income is unpredictable or they have a hard time controlling their spending. There are a variety of factors that can affect whether or not someone is able to save money without budgeting, including income, spending habits, and financial goals. If you are one of those who can’t easily save money, then you should give budgeting a try! We even have concrete examples of people who saved money with budgeting: check out Kaila, who saved 10,000 in 3 months, and listen to Erin, who took the lowest salaried job offer and saved 10,000 in 10 months.
- Budgeting is important because it will help you find out how much you can borrow. By taking a close look at your income and expenses, you can get a better sense of how much wiggle room you have in your budget to make loan payments. You’ll need to calculate how much disposable income you have each month, and then you will have a good idea of how much you can realistically afford to repay each month. In other words, budget planning is essential to knowing how much you can afford to borrow. If you don’t do it before getting a loan, you might find out that you can’t afford it just after you took it, and then you have to suffer the consequences.
The biggest problems with budgeting:
Up to this point, we tried to figure out why budgeting is important, but from a critical thinking standpoint, we should look at the problem from the opposite perspective as well. What are the reasons budgeting might not be as important as it seems? Are there any good reasons?
The answer is yes, there are some good reasons why budgeting is not important; the real question is if they apply to you or not. Let’s dive deeper!
1) The scarcity mindset
There’s a lot of talk these days about the “scarcity mindset” when it comes to budgeting and about how this scarcity mindset can actually work against you. If you focus too much on saving, you will lose the opportunity to think about how to earn more (abundance mindset). And saving will always be limited by the amount you earn right now. And if you don’t earn a lot, focusing more on savings will have diminishing returns. This means that in the first hour you focus and plan to save money, the results might be significant, but they won’t be doubled if you think about savings for 2 hours. And the more you think about savings, the less the impact each hour has on your overall results because what you can save is limited by your income. You can’t save more than you earn. But you can save more money if you earn more. Let’s take an example: you earn $3,000 each month. Let’s say all your expenses are $1,500, and you save $1,500 each month. If you focus all your attention on saving, you might be able to reach $2,000 in savings after a lot of tweaks and struggles. So that is an extra $500 you got for a lot of work and time invested. And it will be increasingly harder to save even more than that without big sacrifices. Compare this with an abundance mindset, in which you save $1,500 each month, but you focus your attention on earning more. In the beginning, you might earn less than you saved in the previous example, maybe only like $100 (because earning more is actually very hard and challenging), but in time, as you become better and better at it, you might earn $1,000 extra, $2,000 or even $3,000 extra. Compare this to the maximum $500 you could earn if you focused only on saving.
Some experts like Grant Sabatier, who is a financial independence expert and the creator of the blog “Financial Mentor”, the author of the book “Financial Freedom: A Proven Path to All the Money You Will Ever Need”, take a hard stance on this matter and blame budgeting to be the no. 1 thing holding you back from saving as much money as possible. Sabatier has been featured in many major publications, including Forbes, Time, CNBC, and The Huffington Post. He has also been a guest on numerous podcasts and radio shows.
But I think the problem is more nuanced than people would like it to be. And in the end, you can’t really apply this thinking to everybody. It might work wonders for people who consider themselves hustlers, who prefer easier jobs that don’t drain out all their energy so that they work overtime on other projects. But it might not work for people with very fixed career paths and jobs that drain all their energy, like for example nurses, the military, drivers, or construction workers. It might work if you are a security guard, if you have a job where you spend all day standing around, and you come home and you have enough energy to try something new. It might be perfect for you. But surely it is not for everybody. So, take this with a grain of salt. In theory, it’s good advice, but does it really apply to your specific circumstances?
2) Budgeting takes a lot of time.
Budgeting can take a lot of time, depending on how complex your finances are. If you have a lot of income and expenses to track, it can be quite time-consuming to create and stick to a budget. Habits are the most important things that reduce the time investment required for budgeting. But again, it takes some time and repetition until they are formed. So, even if you consider budgeting important, if you don’t have enough time to do it, especially in the beginning, there is a reasonable chance you will fail. Besides habits, there are more ways to make budgeting quicker and easier, such as using budgeting software or apps, setting up automatic payments, and simplifying your finances. But, let’s not kid ourselves; even with all of them together, it will take plenty of your free time. The minimum time I could come up with would be an hour a week, or even just 15 minutes a day. The key is to be consistent and to track your progress.
Conclusion:
Here are the pros and cons of budgeting summarized in simple words:
Budgeting pros:
- It improves lives
- It reduces stress & anxiety
- Changes the way you think about money
- Can prevent getting into debt
- Makes you more accountable; no bullshit excuses
- Can help you stop living paycheck to paycheck
- It helps you save more
- It helps you know how much you can borrow
Budgeting cons:
- Might put you in a scarcity mindset if not careful.
- Takes a lot of time. Valuable time because you don’t have a lot.
In the end, you can think about it like this: budget planning is a lot like an onion. You can peel away different layers to find the truth.