If you're not following a budget, you're not managing your money correctly. Without a budget, you really have no way of knowing how much you're spending each month, and how much room for savings your expenses and income allow for. If you're serious about meeting your financial goals, then you'll need to start keeping track of the money you earn, the money you spend, and the money you save.
Still not convinced? Here are three good reasons to create a budget—and stick to it.
- You want to avoid debt
Americans aren't strangers to credit card abuse, with the average indebted household carrying a $16,000 balance. And a big reason so many people resort to debt is that they spend more than what they bring home. Consistently.
The problem with debt, of course, is that it's a vicious cycle to get trapped in. For every day you owe money, you'll accrue interest on your outstanding debt, and that interest will then get added to your balance to trap you deeper in that hole. At least, that's how credit cards work. If you create a budget, you'll get a better sense of how much you can actually afford to spend, which should, ideally, lead you to better choices. If you know, for example, that you only have $200 a month allocated to entertainment, and you've already reached that limit, you may be more likely to avoid buying concert tickets and spend another evening at home instead.
- You want to improve your savings
Americans on a whole are in the midst of a savings crisis, and it's not getting better anytime soon. It's estimated that 57% of U.S. adults have less than $1,000 in savings, which is hardly enough to constitute a true emergency fund. More disturbingly, 39% have no savings at all, which means they're extremely vulnerable to debt in the near term.
If you're serious about building savings, then it's imperative that you create a budget. First, mapping out your various costs and comparing them to your income will give you a sense of how much savings potential you have. And if that number isn't particularly impressive, that budget will help you better identify ways to trim your living expenses and free up more money for savings.
For example, imagine you're currently spending $150 a month on takeout orders. Though you do need to eat, you can certainly do so more cheaply. So if cooking your own food saves you $100 a month, that's cash you can put directly into the bank. But without a budget, you may not realize how much you're forking over each month for takeout in the first place.
- You're committed to being more financially responsible
One final reason to start using a budget is that you want to get a better handle on your finances overall. Maybe you're not (yet) in debt, and you have a nice amount of savings. But you never know when your circumstances might change, your savings might get depleted, and you might land in a position where you're dangerously close to racking up a credit card balance because you don't have the money to pay your expenses.
Having a budget can help you approach your finances more responsibly so that if, for example, a few of your bills go up, you can take steps to compensate elsewhere before running into problems. Besides, it's just plain good to know where your money is going, even if you're convinced you have plenty of it.
If you've yet to start using a budget, don't delay: Sit down, list your expenses, and compare what you're spending to what you're earning. Creating a budget is easy, and it doesn't require fancy software or even a significant time investment. And the sooner you establish your household budget, the sooner you'll begin reaping the benefits that come with being on top of your finances.
This article was written by Maurie Backman from The Motley Fool and was legally licensed through the NewsCred publisher network. Please direct all licensing questions to firstname.lastname@example.org.