Financial emergencies can come in all shapes and sizes and you have to be able to take care of your family, enjoy a comfortable retirement, take advantage of an investment opportunity or just avoid bankruptcy. The idea of budgeting is straightforward: you cannot spend more than you earn. In theory, it’s easier said than done and there are occasions that you overspend out of impulse, boredom, or just because a new credit card has arrived in your mailbox with favorable credit terms. Yet, a budget will enable you to spend money in a controlled way, while covering your expenses and saving money on a regular basis.
A budget gives you financial direction. If you plan to buy a house in two years, you have to come up with financial strategies that will allow meeting this goal. This requires you to keep your finances within your budget. Furthermore, by setting up a budget you can periodically measure your progress and make any necessary changes. By allocating your money in the best way possible allows you to have a clear picture of how much you spend, on what items, how often and so on. If you do this on a monthly or even a weekly basis, you know how much you spend and how much is left and you can put more money on saving or investments.
A budget gives you financial control. By knowing exactly how much money you spend on fixed expenses, including rent, mortgage, gas, utilities, and insurance, you can adjust your variable expenses accordingly and spend less on groceries, entertainment or personal care. In that way, you know what you can afford and you can use your credit card or get a loan only for special purchases.
A budget helps you save money. By keeping track of your finances on a monthly basis and adjusting your variable expenses accordingly, you can save money. These savings can be used for starting an emergency fund to anticipate any sort of financial emergency. For instance, if a large medical bill comes up or you have a sudden car or home repair, you can spend this money from your budget. Alternatively, you may need money as a down-payment on the house you plan to buy in two years. In any case, a budget encourages moderate spending.
Improved credit score
A budget helps you improve your credit score. By seeing how much money you have left each month after covering your fixed expenses, you can start paying off your debt and put more money on your credit card. Many people believe that paying the minimum installment is enough to lower the interest rate on their credit card. This is wrong. Every extra dollar you put towards your credit card balance leads to paying less in interest rates over time. Over time, your credit score is improved.
A budget turns you into an informed consumer. By getting a fair chance of choosing from the range of goods and services available in the marketplace, you can identify items that cost too much or that are not essential to your household, and buy only what you need at the lowest price.
Overall, a budget is your financial guide. Budgeting can help you identify areas where you’re spending too much and improve your quality of life. A realistic budget can help you plan for the future and forces you to realize your financial situation without depriving you of the fun of shopping or spending for yourself. In contrast, a budget gives you greater freedom to spend your money on items that you really need without putting your financial future at stake.