What Is Budgeting: 3 Reasons to Budget
Updated: January 8, 2021
Financial independence takes work. However, you’ll never maintain wealth if you cannot manage your finances by budgeting. You can use the three pillars of financial independence (build wealth, invest income, and generate passive income) to make money. Yet, if your spending is out of control, you will not stay wealthy. Countless millionaires who have filed for bankruptcy have learned this lesson the hard way. Knowing how to build and stick to a budget can help you retain wealth at any income level.
The value of this skill is even more critical with today’s turbulent economy. If you want to be financially independent, you have to know how to budget.
What Is Budgeting?
A budget is a way to plan how to use your money. When you follow your income and expenses over time, you’re taking the first steps to making a budget. What doesn’t help is just stashing your receipts in a pile and forgetting them. Paying your bills on time, without reviewing them first, doesn’t aid in budget creation either.
So what do you have to do to create a budget? A proper budget should be:
- Written down on paper or digitally. It can be as simple as a written document or a spreadsheet. If you don’t want to create one yourself, there are several budgeting tools available that can make the process easier.
- Completed before the month over which it should be applied. If your budget is for May, it should be completed before May begins.
- Documenting every dollar you bring in as income.
- Accounting for every dollar spent.
The Main Reasons We Make a Budget
People choose to budget for a number of reasons. Some may be chasing a financial goal, and use budgeting as a way to achieve it. We create budgets to find money for savings and retirement accounts. Budgets are useful for managing monthly financial obligations while juggling credit cards and other loans. Perhaps you’re tired of just barely having enough money to get them to the end of the month. You may want to build your emergency fund to cover an unforeseen event (like car repairs or losing your job). In some cases, we may have extra income, and we want to know the best way to manage it.
While the reasons above are all good, the three most common ones are listed below:
- To be more mindful of your money. A budget shows how much money you earn, what you spend and where you spend over a period of time. Understanding how money enters and leaves your possession helps you create a baseline that can be used for future budgets.
- To manage your finances better. By tracking how and where your income is spent, you can identify discretionary income. Discretionary income is the money that remains after you subtract rent, utilities, and other financial obligations (like student loans). You can redirect your discretionary income towards savings without significantly impacting your quality of life.
- To eliminate worry. Once you know where your money is going, you can eliminate the unknowns and minimize unexpected spending. You know how much discretionary income you have, so you also know what you can afford to purchase.
You should spend the time to develop your own budget. As you stick to it, you will see more benefits develop. When practice budgeting, you’ll soon discover it is one of the strongest tools to take charge of your financial future. With it, you have the power to control your money and make better financial decisions.
Create a Working Budget and Stick to It
By now, you should understand why budgeting is an essential habit if you want to gain financial independence. Now, and not later, is the best time to create a budget. We know that it can be hard to motivate yourself to stick to a budget, especially if it is extremely strict. Your budget should be tailored to your needs, factoring in what is important to you. This way, it will be easier for you to follow it long-term. It takes discipline and consistency to stay with your budget long enough to get the outcome you desire.