7 Reasons Why You Need to Start a Budget Now (2024)

Sandy knows she is growing her savings by having a surplus each month and putting it in high yielding online savings accounts. When she was puzzled about budgeting, she wrote in to ask:

I have $100,000 saved up in bank accounts by following good frugal practices that you and others outline. I however don’t budget and never keep track of my expenses. I know I’m saving money because my account grows every month. Why should I budget?

Good question Sandy.

I know it’s tedious to keep the expenses tracking up-to-date. Plus, it’s not like neglecting to enter all the data has any immediately noticeable impact on us anyway. However, maintaining a budget is like maintaining a bridge. There may not be problems even if you neglect maintenance for a long time, but consequences can be disastrous when an accident finally occurs. There are many reasons to make a budget and keep track of all expenses aside from growing a surplus. I list a few below for your consideration:

1. Builds Discipline and Organization

Having a budget helps you stay disciplined to organize your finances, which is the first step in knowing your overall financial health. Without easy to read data, there is no way of know what is going on. The good news is that once you have a routine going, then it doesn’t take that long to have everything up-to-date.

2. Forces You to Think About Money

This is a side benefit of having a budget but it’s an important one. The more time you spend thinking about your money, the more focus you are in building your wealth. Once you start thinking about money often, you will be able to find more ways to save and more ways to generate income.

3. Crisis Prevention

Looking through your finances at regular intervals will allow you to spot trends and see areas that can be improved way before it becomes a problem. By preventing a crisis from starting, you are way ahead of everyone else who can only react.

4. Great Tool to Start Family Discussions

Money is always a hard subject to discuss. If the whole family is involved in budget making and expense tracking, it makes discussions much easier. It’s always a good idea to just lay out the facts when talking about money matters and the expense tracker is the perfect tool to aid in this regard.

5. Quantifiable Way of Measuring Progress

In theory, we all want to reduce our spending and make more money but knowing how well we are doing without actually keeping track of your progress is impossible. Tracking your budget to measure progress is not just a benefit but a requirement if you care about becoming more efficient at saving money.

Without a budget, how do we know that we are meeting our goals?

6. Knowledge is Power

By keeping track of your budget, you will know exactly how much money you need every month. You can then plan and build an emergency fund with a high degree of confidence in having sufficient cash. You can also easily figure out how unexpected issues like losing a job or having a child will affect your financial health.

7. Stress Reliever

Knowing your exact financial situation lifts a tremendous amount of stress off your shoulders because you don’t have to worry about the unknown. Even if your financial situation is shaky, you will be spending time fixing the problem and not trying to find out what the issue is.

But David, maintaining a budget is so hard!

I get it.

Budgeting and learning how to spend your money wisely for the first time is a challenge for everyone. You’re bound to make mistakes too. To get you started, let me give you four steps to make things easier.

1. Know Your Take Home Income

When you get your first job, you will get a salary offer. Let’s say you’ll be making $20 an hour or roughly $40,000 annually. Does that mean you’ll be taking home a little over $3,300 a month?

Absolutely not!

When you get your first pay stub, you’ll see that many expenses are deducted from your paycheck, such as state and federal taxes, social security income, and health insurance (just to name a few). This can take up a very large percentage of your gross pay, on average 25%. It’s important to know what your true net or take-home income will be so that you can properly budget.

2. Understand All Your Expenses

Whether it’s your first time living away from your parents or you’ve lived on your own since forever, you need to make sure you understand what all your expenses will be. This includes the big items, like rent, all the way to the little things, like toilet paper. If you’re trying to figure out how much to spend on rent, a good rule of thumb is 30% of your gross income, but that also depends on where you will be living. If you’re in a big metropolitan city, that number could be a lot higher.

Also think about your food costs, which will probably be your second biggest expense. If you’ve never had to do grocery shopping before, a good first step is to just hit the grocery store with a list of necessary items you need to buy weekly. Get a gage of how much everything costs so that you can better budget for this in the future. Remember, all the little things add up so make your budget as detailed as possible.

3. Be Organized, Track Everything

One of the most important things about managing your finances successfully is organization. You simply just need to track everything very well. Once you have that down, you’ll have an accurate snapshot of how you’re spending and what you should cut back on. Many people forget the little things, like your daily cup of coffee, but a small expense like that can add up in the long run.

Make sure you’re keeping track of everything. The easiest way to do so is by starting a spreadsheet where you input your expenses. Tools such as Mint.com are also great to use because you can integrate it with your bank and credit card accounts to help you track your purchases.

4. Save, Save, Save

Being on your own for the first time is exciting and there will be an urge to do everything and spend on everything. But remember that it’s important to live within your means because not doing so will get you in a lot of trouble down the road. Start good financial spending habits now. Have a small budget for discretionary spending, but for the most part: save, save, save.

Start an emergency fund as soon as possible — because you truly never know what can happen in life. It’s also never too early to start thinking about retirement. With the power of compound interest, the earlier you start saving for retirement, the more you see later on.

Tagged as: Budgeting, Expenses