Budgeting is the most effective way to manage your money. When you make a budget, you decide proactively where you want your money to go. This gives you the opportunity to match your spending to what matters most to you in life.
Some people see budgets as restrictive, but actually, the opposite is true. A budget gives you the freedom to spend guilt-free, within the boundaries you’ve set for yourself. A budget gives you control over your financial picture, and provides you the opportunity to make progress towards your personal financial goals.
If you’ve always been fine in the past, you might be asking “why do I need a budget?” But even if your finances are okay right now, a budget could significantly improve them and help you avoid future issues. In the sections below, we’ll go over all the benefits of budgeting to show you why it’s such an essential financial habit. After that, you’ll learn how to create and manage a budget.
So — why is budgeting important? See the seven powerful reasons for budgeting below.
1. Get an Accurate Idea of Your Spending Habits
Why are budgets important? The process of making a budget shows you where and how you spend your money. This can guide you in a few important ways no matter what your financial situation looks like.
If you’re under financial stress, you may be looking for ways to free up more money. A budget can help you do that by providing a complete picture of your spending habits. You'll see how much you're spending in different categories, which will empower you to make deliberate adjustments that can help create financial freedom.
Even if you’re doing well without a budget, having one can help you take a big step forward. Here are a few ways a budget can help with money management:
Helps you make informed decisions before taking on new monthly bills or making big purchases
Lets you find more money to speed up progress toward financial goals
Allows you to allocate more spending toward what’s most important to you
2. Make Progress Toward Financial Goals
“Why do I need a budget?” We all have financial goals. Some of these are for things you want, such as saving a certain amount of money for a home or for retirement. Others may be for things you want to get away from, such as debt that keeps you from financial freedom. A budget makes it more likely you’ll check off these goals, and it speeds up the process.
Here are some examples of popular goals a budget can help you with:
Buying a car
Home renovations
Getting ready financially to have children
Traveling more
Retirement
Although there are a variety of financial goals you could pursue, they generally fall into one of three categories: Saving for future expenses, paying down debt, and investing. With a budget, you can figure out how much to put towards each one and go after each goal simultaneously.
For more info, see our article on The 23 Budget Categories You Need in Your Budget.
3. Control Your Spending and Pay Off Debt
Why is budgeting important? If you have debt, especially high-interest debt above 7%, a budget can be your secret weapon to pay it off. You can use a budget to lower your spending, and then use the money you save for an additional debt payment.
Budgeting Example: Paying Off Debt
Let’s say you have $5,000 in credit card debt at a 20% APR (annual interest rate), which is about average. If you only make minimum payments (which we assume to be interest plus 1% of the balance, or $133/mo to start on a $5,000 balance), it will take 23 years to pay off your credit card. In that time, you’ll pay $7,723.49 in interest on top of the original $5,000 in debt.
Now, imagine you make a budget and free up some money, allowing you to pay $300 per month towards your credit cards. You’ll pay off your debt in less than two years, paying only $906.81 in interest. You’ve just saved yourself almost $7,000, just by having a budget.
4. Set Yourself Up for a More Comfortable Retirement
There’s no overstating the importance of saving enough for retirement. For the average earner who retires at 65, Social Security only replaces about 37% of past earnings. If you don’t have enough saved, you may need to work much longer than you’d like or live on very little income in retirement.
Unfortunately, many adults aren’t saving nearly as much as they should. A 2017 survey by the U.S. Census Bureau found that 49% of adults aged 55 to 66 had zero retirement savings.
Why are budgets important to retirement planning? With a budget, you can ensure you’re saving enough (15% of your income is a good target). Or, if you’re not there yet, you can use a budget to find places to cut back and redirect that money toward your retirement accounts.
5. Prepare for Unexpected Expenses and Emergencies
Emergency expenses are a fact of life. You never know when you’ll face them, but you can be sure they’ll come up at some point. Here are a few examples of unexpected expenses:
You lose your job and don’t have any income until you find a new one.
You or your spouse has a medical emergency, leading to costly healthcare bills.
Your home or car needs expensive repairs.
The best way to prepare for these, and any other surprise expenses, is with an emergency fund. And the best way to build an emergency fund is by budgeting so you can set aside money for it every month.
A good initial goal is to save one month’s worth of take-home pay in a separate savings account. After that, aim for three to 12 months of take-home pay, depending on your financial needs.
To learn more about budgeting’s importance to emergency funds, see our article: How Much Emergency Fund Should I Have?
6. Reveal Overspending
Why else is budgeting important? If you don’t follow a budget, there’s a good chance you have some financial blindspots. You probably know how much you spend on your big fixed expenses, like your mortgage, car payment, and insurance. But people often underestimate how much they spend on everything else, like subscription services, eating at restaurants, impulse purchases, and flexible expenses that vary from month to month.
You may be shocked to see just how much you’re spending when you make a budget and track your expenses. This provides a great opportunity to realign your spending habits. It doesn’t need to be a massive change, either.
Budgeting Example: Overspending
The average household overspends by $340 a month. Imagine that you’re able to cut $340 of expenses, just by going out less and ditching a few extras and subscriptions you hardly ever use. You decide to invest that extra $340 per month towards your retirement. Assuming a 7% annual return, after 20 years, you’d have over $167,000 in additional money in retirement.
7. Give Yourself Peace of Mind
Why is having a budget important to your happiness? A budget helps alleviate stress because it puts you in control. If you’re feeling overwhelmed by your bills, making a budget will help you figure out how to manage them. If you’re worried about the future, a budget will be the road map you can follow to reach your goals.
Stronger Relationships
Money can be a stressful subject, especially for couples. Maintaining a budget helps take away much of that stress and prevent money fights. If you and your partner make and follow a budget together, you’re much less likely to have disagreements about not saving enough or spending too much.
Happier Spending
One more reason you’ll likely feel better with a budget is that it allows you to align your spending with your values. When you don’t track where you spend, it’s easy to waste money on things that don’t make you any happier. When you budget, you’ll naturally think more about what you want to do with your money to improve your quality of life.
For example, you may decide you want to set aside more money for traveling or a hobby you enjoy, instead of spending so much on an expensive car payment.
How to Create a Budget
“How do I budget my money?” Budgeting is faster and easier than you may think. It doesn’t take long to create a budget, and you really only need to check in once a week. Here are four simple steps to follow to create a budget.
Track How You Spend Money
Start by reviewing all your expenses for the last three months or so. This will give you an accurate idea of how much money you’re spending and where. Don’t forget to account for bills that aren’t paid every month, such as auto insurance.
Pro Tip: Syncing all your family accounts, statements, income, and expenses in one place with the Monarch Money app can make tracking your spending substantially easier.
Use Three Main Categories
Split your spending into fixed, flex, and non-monthly expenses. Fixed expenses are those items that stay about the same month to month and can be put on autopay, like a fixed car payment, mortgage, utilities or a Netflix subscription. Flex expenses include all everyday spending from groceries to entertainment to medical copays. Non-monthly expenses are things like an annual tax payment, travel and holidays gifts - these are expenses that happen within the year, but don’t happen every month. For non-monthly expenses, add up the total for the year and divide the total by 12 to figure out how much to set aside monthly to cover your non-monthly expenses on an ongoing basis.
Make a Realistic Spending Plan
Figure out any changes you want to make in your spending, and set guidelines on how much you can spend in each area. For example, if your take-home pay is $9,000 per month, you could set the following guidelines (these can be adjusted as needed for your specific budget categories):
$5,000 per month on living expenses
$1,000 per month on savings goals
$1,500 per month invested for retirement
$1,500 per month for fun spending
If you need help budgeting, see our article on The 23 Budget Categories You Need in Your Budget.
Pro Tip: Remember that just like crash diets, crash budgets don’t work long term. Don’t try to make huge, overnight changes. Set reasonable goals for yourself.
Track Your Budget Weekly
Check how much money you spent during the week and see if it matches the guidelines you set for yourself. If not, adjust your spending to get back on track. Don’t make the all-too-common mistake of waiting until the end of the month to look back and see how you did.
Adjust Your Budget as You Go
Be prepared to adjust your budget if your financial situation changes or you see areas you can improve. You may get a raise, in which case you’ll need to decide how to allocate that additional cash flow. Or you might find that you have extra money left over every month, so you’re able to save more.
Pro Tip: Keep a prioritized list of non-essential expenses you could cut if you had to. Doing this can make lean times less stressful because you’re already equipped with a plan.
For a complete guide on how to make a budget, see our article on How to Budget as a Couple.
Everything You Need to Start Budgeting
So — why is budgeting important? It puts you in control of your spending, helps you pay off debt, sets you up for a better retirement, reveals overspending, and improves your quality of life.
Budgeting used to be more time-consuming, but you don’t need to do it the old-fashioned way. An intuitive money management software tool like Monarch Money can simplify the budgeting process for you. It allows you to create a fully customizable budget and track your spending in real time.
