Are Budgets Necessary?
The idea of a "budget" just sounds restrictive. Placing limits on how you spend your hard-earned money seems like the exact opposite of the financial freedom you crave. But spending money without a savings plan for the future — or even knowing how much you need to save — can put you in a financial bind that's hard to escape.
Tracking your income and expenses using a budget is key to taking charge of your finances. A budget can also help you avoid unnecessary debt and financial stress.
Let's explore the benefits of budgeting along with different budgeting styles. We'll also provide suggestions for selecting budgeting tools that can bring you true money freedom.
A budget can put you in the financial driver’s seat and help you achieve your goals sooner. When you make decisions based on your budget and money goals, you can avoid the negative consequences of overspending, money fights with a partner, and debt accumulation. Budgets also make it easier to build an emergency fund, keep your finances organized, and stop living paycheck to paycheck.
Types of Budgets
There’s no one-size-fits-all approach to creating a budget. Luckily, you can combine features of multiple budgeting approaches to match your personality. Here are three types of plans to help you get started.
Pay Yourself First Budget
With this budgeting approach, you are the most important expense in your budget. When you pay yourself first, you use that money to help reach a specific goal, such as retirement savings. The rest of your money is used to pay for other expenses. By paying yourself first, you reduce the chances of overspending in other areas, which can lead to shortchanging your savings plan or forgoing savings altogether.
If you’re comfortable tracking every dollar, a zero-based budget can help you do that while keeping you on track toward meeting specific financial goals. Every dollar is earmarked for a specific expense, before you receive it. This approach discourages impulse buying and can feel restrictive to some, but it can make others feel more in control of their finances.
Instead of counting every penny, the 50/20/30 budget encourages you to spend a percentage of your income on specific spending categories. If you need flexibility in your spending, this budgeting style might be a good fit.
- 50% = Needs
- 20% = Savings
- 30% = Wants
With this budgeting approach, the Needs category consists of half of your take-home pay and should cover all your bills and necessary expenses, including housing, groceries, and minimum debt payments. A full 20% is set aside for Savings. The remaining 30% can be spent on entertainment, eating out, and paying down debt. If you’d like to speed up your savings goal, just reduce spending in the Wants category and redirect the extra money to Savings.
Sticking to your budget is easy when you have the right tools to support your efforts. The harder it is to adopt a budget, the greater chance there is of abandoning it. Consider using tools that hold you accountable, but require little time and are easy to follow.
Grab your favorite writing tool, notepad, and calculator. Those are the only supplies you need to create an effective, low-tech budget. Start by identifying your expense categories and setting spending limits for each one. Your income will determine how much you can spend in each category while still making progress toward your other financial goals.
There are a variety of online and mobile budgeting tools available for almost every personality. The same budgeting process applies here, but an electronic budget tool allows greater flexibility.
Unlike a paper budget, online tools allow you to easily recalculate income and expenses, make changes to savings, and automate your bill payments with a few clicks. It’s even possible to link your financial institution’s mobile app to your checking account and receive alerts when you’re close to or have exceeded your pre-set spending limits.
When you set up and follow a budget that works for you, you’ll never again have to wonder whether your next purchase is taking you further away or bringing you closer to your long-term financial goals. And who doesn’t want that kind of peace of mind?
Article by Tracy Scott