You probably know there is such a thing as budgeting and may even understand that its important to have a budget. But do you really understand budgeting?
Most people don’t understand budgeting
As a group of people, we Americans are known for being big spenders and poor savers. There are at least two factors that contribute to this – higher living expenses and stagnant wages. However, another cause of this may be the fact that most people just don’t understand budgeting.
Why have a budget?
There are a number of good reasons to have a budget, including…
- Relieves financial stress
- Helps you meet financial goals
- Allows planning for large purchases
- Enables you to avoid late payments through scheduling payments
- Frees up money you can designate for saving
- Allows you to create an emergency fund
- Helps structure a plan for your future
- Uncovers money you could invest
- Creates a thoughtful awareness of spending
- Increases your financial security
- Helps find hidden money you could use to pay down debt
- May raise your credit score
So why don’t people understand budgeting and its importance?
The biggest problem with budgeting is that most people think negatively about the word. The National Foundation for Credit Counseling did a study where and it found that 57% of those who responded did not understand the purpose of a budget. They thought of it as a restriction on their spending instead of as a responsible way to identify financial waste. The fact is that a budget will actually provide the framework that would allow you to take charge of your spending and direct your dollars to their best uses.
Budgeting is a plan
The best way to think of a budget is that it’s a plan for spending and saving. The way you spend your money should be a reflection of your priorities. But if you don’t have a plan, your priorities can get shoved aside in favor of urgency or what you need to do now.
Everyone needs a spending plan
Most experts feel that it’s a disgrace that budgeting has such a negative connotation. The fact is, everyone needs a spending plan. When times get difficult, it’s even more critical to have a budget. If you’re in a position where every penny counts, it’s important that you make sure you count every penny.
Only 24% of Americans
According to the website Bankrate.com, only about 24% of us have enough money put aside to cover our expenses for six months. The even worse news is that 50% of us do not have enough savings to get through three months, and 27% have zero emergency savings.
How to get started budgeting
Now that you know the importance of having a budget, you need to get started. The best way to do this is by tracking your spending for at least 30 days so you’ll know where your money’s going. There are a number of good and free smart phone apps that can help you do this almost painlessly. Once you have tracked your spending for those 30 days, you will need to categorize it. Again, your smart phone app should be able to help you do this. For example, Mint.com will track your spending, automatically categorize it and then help you develop a budget. It’s available for use on just about any smart phone and desktop computer. The beauty of Mint is that it will also put all of your financial information together into one place – including your checking account, savings account, bill payments and investments.
You Need A Budget
Another very popular way to create and stay on a budget is the software program You Need A Budget (YNAB). It’s available for use on any PC as well as an iPhone, iPad or Android phone. YNAB will not do everything that Mint will do but is a crackerjack way to develop and stick to a budget. It costs $39.99 but includes free, live classes to help you gain control of your finances. Here’s a short video with information from YNAB.
Once you know where your money’s going, you need to find better ways to direct it. That’s a sort of round about way of saying you need to find ways to reduce your spending so you could use the money you free up to save or invest. To do this you will need to carefully review all your spending categories and then take an axe to each. Don’t think of any category as “untouchable.” You should be able to make cuts in every one of them, including even housing and transportation. You might not like to think about this but you could move to a less expensive house or apartment or sell that gas-guzzling SUV and get a used hybrid.
Be sure to also set goals
It’s also important to have goals. In fact, people who try to budget without having any goals rarely succeed. When you have goals – whether short- or long-term – it’s easier to stay motivated because this will allow you to see the progress you’re making towards achieving them, which can be a powerful stimulus for staying on track. For example, let’s assume that one of your short-term goals is to take a cruise that will cost $3000. If you save $150 a month towards that goal, you would be able to see that you’re becoming closer and closer to that dream cruise each month.