Just a quick question before we start. How many of you know how much you make and how much you spend per month? How many of you know where your money goes? Who among you are financially stressed right now because of your financial circumstances?
Would you believe me if I tell you that being broke has nothing to do with how much a person makes per month? Would you agree with me that even people who make 6-figures can be as broke as a person who is unemployed?
Today, I would like to answer a very important question that most of us are probably never going to ask!
What is a Budget?
Before we start, let me define what a budget is. A budget is an estimated income and expenditure of a person over a period of time. A budget is often made to help a person what activities or things they can spend on depending on their income.
Ideally, a budget should be close to zero or in other words, a person’s income should be equal to their expenditures. A negative budget means a person is spending on things and activities that they cannot afford. This situation should be avoided at all cost! Surprisingly, a positive budget is also something that should be avoided since it means that a person has extra cash that is not working, e.i. extra cash should be put on investment so it grows over time instead of just sitting in a savings account doing nothing.
Why Budget is Important
Maybe for some of us, when we hear the word budget, we assume that it is only for companies to do. Maybe we think that our pay is too small and budgeting would be a waste of time. On the other hand, maybe we are getting paid well, so we believe that we will not run out of money. These assumptions are bad, and if we continue to believe in these, then it is only a matter of time before we hit a financial wall.
Below are some of the reasons why it is important to budget.
Reduces financial stress
Do you know that one of the main reason why couples divorce is because of the financial strain? This is especially true when one party spends a lot while the other wants to budget or when both don’t know how to manage their money and then all of the sudden a financial crisis hits.
Doing a budget also reduces financial stress because it enables you to be in control of your money and not another way around. Without a budget, we will always wonder if we have enough money to keep us financially afloat until our next paycheque comes. We would always feel guilty to pick up the item we like to purchase for ourselves or as a gift to others thinking that we cannot afford it. There are also times where we pick up items thinking that we still have balance in our bank but later on learn that our bank charged us with a hefty overdraft fee.
If we don’t want to experience financial stress, then making a budget is the solution. If we know your monthly income, then you can allocate how much you will spend per month. It will help you avoid second-guessing whether we still have money or not when purchasing something we need or something we want.
Let us know where our money is going
Regardless of how much we make, it is important for us to know where our money goes because it helps us to live according to your means (spend only what you make), helps us prioritize our expenses, and be able to prepare for any financial emergencies.
Knowing where our money goes also protects us from scams and fraud.
I remember one time I got charge about C$350+ on my credit card for dental bills that I never had but since I am tracking my budget, it helped me caught the fraud before paying my bills. I reported the incident so my credit card company investigated the incident and then they refunded me a few days.
Another reason why it is important for us to keep track of our money is it helps us prioritize our expenses.
Maybe you have been wanting to buy your dream car or you needed to renovate your kitchen but you are convinced that it is impossible because of your current financial situation. However, after making a budget, you realize that you are spending too much buying collectible toy cars or you have been eating out too much. Since now that you have an idea where your money is going, then you can decide not to buy toy cars anymore or cut out eating out to save for the things you really like.
Enables you to prepare for a future big purchase
Let us be honest, we rely on loans and credit cards when it comes to big purchases instead of saving up. Loans and credit cards make it extremely easy for us to purchase expensive things, but do we really want to wake up every morning thinking if the repo guys or loan collector will finally come and get us that day?
Also, do the math, if you borrow $1000 on a credit card, then you will have to pay about $190 for interest compared to $0 if you budget your money and save!
Budgeting for future big purchases is extremely easy. All we need to do is to know when we will do the big purchase and how much it will cost us to determine how much we should save per month.
For example, if you want to buy a MacBook Pro for $1000 and you need it in 6 months, then you will have to divide 1000 by 6. By doing so, you will know the amount you need to save for 6 months to enable you to purchase your MacBook Pro, in this case, you need to save $166.
Prepares you for unforeseen financial difficulties
Unless we live in a perfect world, unforeseen financial difficulties can always strike us. It could be sudden medical bills or getting terminated from our work. It could also be our car or furnace suddenly breaking down. No matter what the situation is and when it happens, if we budget our income for these emergencies then we would not have to worry a thing.
The rule of thumb is to have an emergency savings account that has an amount of at least 3 to 6 months worth of our salary. That could be really tough to build at the beginning but we need to develop the discipline to save for the rainy weather.
Since it is only you who knows your financial situation, then it is only you who can decide how much to put in monthly. Maybe you can put in a couple of hundred of dollars in there or you can only put $50. The amount is not important, what is more, important is you have the discipline to prioritize your expenses so you can put money on this account over spending it elsewhere.
Makes you generous
Maybe some us would not see being generous as an advantageous result of budgeting, but giving back to the community is a really commendable thing to do. Instead of thinking that there is someone richer than you, therefore, you need to earn more, why not think that we are more blessed than others, therefore, we need to give back.
One of my mentors told me, “it is better to be in the position of a giver, then being in the position of a receiver”.
It is easy to say I don’t have money to give, but if you have a budget and make a conscious choice to save at least $10, then by Christmas season, we can donate $120 to our favorite charities as a Christmas present to those who are less fortunate than us.
There you go friends, I hope this article inspired you to create your own budget. I hope that I am able to persuade you that there are lots of benefits for doing a budget. Yes, budget can be time-consuming. I understand that maybe some us don’t want to face our financial reality, or maybe some don’t ever need to worry about money, but as I mentioned above, budgeting is for everyone regardless of our income. Budgeting allows us to take control of our financial situation. Budgeting is like telling our money who the boss is!
Love to Hear From You
What about you, friends? Do you have a budget? Do you agree to the benefits of budgeting that I mentioned? Why or why not?
Do you know other benefits of budgeting? Please feel free to share it on the comment section!