Budgeting for Beginners: Understand the Reasons First

Early in my adult life, I found out the perils of debt firsthand. I dealt with the stress of it, experienced how it can hamper your lifestyle, and learned countless lessons about why it should be avoided. Through that process, I also discovered the importance of careful and strategic budgeting. While a lot of people make enough money to cover all their bills and don’t worry much about following a budget, you can make each dollar go a lot further when you know how your money is being spent. To illustrate what I’m talking about, let’s walk through some of the benefits that come with having a month-to-month financial plan: the real purpose of budgeting.

Stay in the Know

Unless you check your bank account(s) every time you use one of the various credit and debit cards in your wallet, it’s hard to know exactly how much cash you have at any given time. This isn’t crucial on a day-to-day basis, but the importance of budgeting quickly becomes clear when it comes time to buy a car, make a house payment, or pick the right preschool for your child. When faced with a big expense, you don’t want your first thought to be: “How much money do I have?” That’s something you should already know.

By keeping my budget accurate, I know where my money is being spent and I’m also prepared when it comes time to spend more. In other words, the main purpose of budgeting is just to keep track of the money you earn. This way, you don’t overspend one month and then feel like money is inexplicably tight the next. Without a budget, a new car might seem like an impossibility. With a strategic system for tracking your dollars, a monthly car payment becomes much easier to reconcile.

Don’t Get Caught Off Guard

No one can predict every expense that will arise over the course of a year. If you can, I’d advise you to take that clairvoyance to Las Vegas and never worry about money again. For everyone else, the best we can do is expect the unexpected and be prepared. This is where a lot of people come up short because they don’t truly understand why budgeting is important. Think about the following non-monthly payments:

● Car repairs

● Medical bills

● Annual subscriptions and dues

● Home maintenance

Any one of those bills can show up in your mailbox at an extremely inopportune time. If you aren’t planning to spend $800 on an insurance deductible, that’s the type of blow that can drive up the balance on your credit card and cost you even more in interest payments. If you know that bill is coming and you have the money ready, it’s no big deal.

You might be thinking, “Taylor, how does having a budget give me more money to pay my bills?” That’s a legitimate question, and the answer, naturally, is that it doesn’t. That’s not why budgeting is important, or some of us would spend all day calculating our household expenses instead of getting a normal job.

However, by thinking about ALL of your expenses, and looking at ALL of your earnings, you can budget for these future costs that seem to sneak up on you. If you look at the big picture, you’ll think twice about taking an unnecessary vacation and instead put a little cash aside to cover an unexpected plumbing disaster.

Cut Back on Frivolous Spending

When people ignore their financial realities, it becomes much easier to buy a $20 meal instead of cooking something at home. Once you start down that path, it’s hard to break the habit of ignoring your debt and living off credit. Spend too much time in that cycle and you’ll get into very dangerous waters. Sadly, a lot of advice on budgeting for beginners don’t emphasize this fact enough.

If you take my encouragement and start budgeting properly, you’ll develop an adverse reaction to unnecessary spending, almost automatically. Daily trips to the coffee shop lose their appeal when you know that money could instead be going into an emergency fund or used to pay down student loan debt. Would it be nice to own a new jacket? Sure. Is it more important than covering the gym membership that keeps you happy and healthy? Maybe not.

When you think about what your budget allows you to realistically buy, you have less trouble distinguishing between wants and needs. Part of the importance of budgeting is that the whole process forces you to face these kinds of questions. Once you get better at putting money toward your needs, you’ll end up having more to cover those wants as well.

Building a Budget That Works

Let’s make no bones about it – this is easier said than done. No amount of budgeting will increase what you take home on your paycheck (though it may encourage you to take the plunge and look for something better). Most of the people I talk to feel like their biggest financial problem is that they don’t have enough money to start with, not that they can’t understand budgeting for beginners. Whether or not that’s the case, setting up a system that allows you to see where your money goes can be a big help.

Now that you hopefully understand why budgeting is important, you should begin by thinking about three main categories.

Earning

How much money do you really bring in? Look at this number from a few different angles to see what’s hitting your bank account weekly, monthly, and yearly. Once you’ve done that, you’ll be in a much better position to judge your spending. After all, it doesn’t matter how much money is going out when you don’t know what you have coming in.

With a solid grasp of your earnings, you can also start thinking about how to earn more. Break down your worth – your value to your employer – and question how you can generate more wealth for yourself and your company. Raises aren’t just handed out, so figure out what you can do to earn one. Knowledge is power, and knowledge of your value gives you the power to generate more wealth.

Spending

As much as you’d like to ignore this issue, you have to dissect it and be honest with yourself. Figuring out where exactly your is money going is one of the main purposes of budgeting. If it’s being absorbed by rent, debt and groceries, that’s your situation and you must forge ahead. On the other hand, if the debt that’s consuming your earnings is related to the new car you bought and your love of artisan cheeses, sacrifices need to be made.

At the very least, let your budget dictate your spending for a month or so. Put your earnings toward your necessary expenses – food, shelter, insurance, debt – and then see where you can cut back. Try changing your eating habits or driving a little less. Spending can be habitual, and developing a savvy budget is a big step toward breaking bad habits.

Saving

When you have debt to repay, saving usually isn’t on your radar. It’s tough to convince yourself that you need a rainy day fund, but its importance cannot be overstated. About one-third of Americans don’t have money set aside for retirement. That might not register when you’re in your 20s and 30s, but believe me when I say that it will definitely hit home when you’re in your 40s and 50s.

You may have to start small, putting away a few dollars a week until you have enough to make a reasonable investment. Whatever it is you can afford, I urge you to set that money aside. Once you start saving capital and watching your wealth grow, the importance of careful budgeting will become very clear.

How To Do It

If you’re convinced that budgeting is smart but still aren’t sure of how to go about it, don’t worry. There are plenty of companies that can help you make the most of your dollars and chart your inflow and outflow. From free apps like Mint to subscription services like YNAB (You Need A Budget), you won’t have any trouble finding some guidance.

My goal is not just to help you grow your wealth over time, but also to empower you to improve your own immediate financial situation. No matter how much you’re making or what your goals are, a solid budget can help you achieve financial happiness. Start tracking your dollars and spending purposefully, and it won’t be long before you’re enjoying the fruits of your labor.