How a budget turned my financial life around and why everyone needs a budget.
Many things in life are optional; a budget isn’t.
Not having a budget is like planning a vacation and getting in your car but not knowing where you're going. You'll drive aimlessly for hours and ultimately run out of gas by the side of the road.
Nobody likes keeping a budget but it gives us a financial road map and helps us get to our destination, money saved and a less stressful life.
See how a budget helped me pay off almost $80,000 in debt, ditch the job I hated and how you can create a budget that works in less than half an hour.
How a Budget Helped Me Pay Off $77,500
Budgeting was the reason I could repay $77,500 of consumer debt in five years. After realizing how much money I was going to pay in interest over the life of the loans combined with the distaste for my job at that time, I made it my goal to become debt-free as soon as possible.
Could I have only made the minimum monthly payment and been just fine?
Yes, but I would have paid thousands of additional dollars in interest to the bank. I like when the bank gives me money, not the other way around. If I didn’t know what my disposable income was after I paid my normal monthly bills, I wouldn’t have known how much in extra payments I could make each month.
Not having a budget would have meant an extra five years of monthly payments and missing out on the financial freedom I enjoy today.
Even Non-Budgeters Have a Budget
Not having a budget doesn’t automatically mean you will go into debt. The odds are significantly higher, but non-budgeters budget without knowing it. Think about it this way, if your only financial goal is spending less than you earn each month and not going into debt, you have a budget.
The difference between a bad budget and a good budget is that a good budget has specific, achievable goals. These might be some budget goals you shoot for:
- Pay off my home mortgage in 25 years instead of 30 years
- Invest 10% of my income to retirement accounts to retire at age 65
- Save $200 a month for 22 months to have three months living expenses in my emergency fund
You don’t wait for the problems to fix themselves, you address them now so they are solved before it’s too late.
Making a Budget Only Takes 20 Minutes
A common myth is that it takes a long time to make a personal budget. We’re not talking about a Congressional budget that must pass through the various levels of bureaucracy. I guarantee, you'll spend less time budgeting each month than you might spend on social media in a day.
At most, it should take 20 minutes to make your budget and check it each month.
Whether you use a budgeting worksheet or an online program, all you have to do is add up how much you earn and where you spend your money. Break down your spending into different categories like food, housing, insurance, gas, and entertainment. Include every-single-expense.
Once or twice a month, compare your actual spending to your planned spending. Pay attention to the individual categories and make any changes for the rest of the month to make sure you spend less than you earn. Maybe you have to delay that $300 purchase until next month to make ends meet instead of paying credit card interest for a change.
If you don’t know how you spend your money, it will take you more than 20 minutes to make your first budget. Before I made my very first budget, I wrote every single expense down on a piece of paper, it didn’t matter if it was my apartment rent (necessary spending) or renting a movie from Redbox (optional spending).
After looking at my expenses, I was not only able to see how much my extra loan payment could be, but also where I could trim my spending in other areas to make that extra payment even higher.
While budgeting can be quick and painless, it will take time every month to track your expenses. The time you spend decreases as you learn how to keep mental notes about your spending. Maria at The Money Principle has a great two-step strategy for mental-budgeting without sacrificing too much.
- Rank the things you want by order of importance
- Allow yourself to have the top wants but then cut out the bottom ones
Budgeting Helps You Plan Your Financial Goals
One reason why so many New Year’s Resolutions fail is that people have a goal, but don't have a plan to accomplish that goal. Budgeting is essential to accomplishing your financial goals.
Sometimes you might receive unexpected money or some dumb luck, but almost always, you must make opportunities happen in life to accomplish your goals. That’s why people talk to financial planners, use retirement calculators, and debt payoff calculators to determine how much money they must earn or save to accomplish their goals.
Otherwise, you’re forever driving without a destination. Driving to a vacation isn't nearly as much fun if you never get there, right?
Say Goodbye to Money Stress
Do you lose sleep because you worry about money?
A budget is your answer. You might have to make some uncomfortable decisions at first so your actual spending comes down to your projected spending. Once your new habits form, budgeting and saving money will seem like second nature.
If you are one of the two-thirds of Americans that would go into debt if a $500 surprise expense occurred, you have nothing to lose by budgeting. Because I budget, I have money set aside for several $500 emergencies.
A budget can help you set aside enough money to afford a financial emergency.
For example, making sure you immediately set aside $50 a month before you spend your paycheck on anything will guarantee you will have $500 saved in 10 months. By tracking your spending and reducing your unnecessary spending to save $100 a month, you can have $500 saved up in five months.
On the other hand, following your budget too strictly can also be stressful. The Physician on Fire argues that budget's aren't altogether necessary and that spending mindfully can be just as powerful. I like the idea of creating a money mindset while you're out spending but it can be tough for people that have never watched their spending to get started.
A Successful Budget Is More Than a Plan
While you might plan to spend less than you earn, having a budget doesn’t mean you will. You need to have the “I can” mindset to follow through on your plans. Yes, we all make the occasional impulse buy and miss our monthly goals, but being financially successful is about planning and not giving up after a mistake.
If your why isn’t the focus of your money decisions, your budget might only be worth the paper it’s printed on.
I budget because it’s easier than hoping I have enough money to pay the bills every month and afford my long-term goals like retirement. By having a plan, a budget, you'll spend less time worrying about money but will have more of it. You have money goals, go ahead and write them down and plan on how you will accomplish them.