When done correctly, budgeting helps you save money and understand where you spent it. However, that doesn't mean budgeting is always easy. That's why you need to know the advantages and disadvantages of budgeting before you start.
If you are struggling financially, budgeting can be a great tool since you will check every single dollar you make and spend, but that doesn't mean you won't have some headaches during your budgeting journey.
So let's find out the advantages and disadvantages of budgeting.
Advantages And Disadvantages Of Budgeting
Every financial method has its pros and cons, and budgeting is no different. In my opinion, the advantages of budgeting outweigh the disadvantages of budgeting, but that's just me. You need to try yourself and find out.
I also want to note that the following advantages and disadvantages of budgeting are quite general – each budgeting method has its own unique strengths and weaknesses. These are some different budgeting types you can try:
- The 50/30/20 Budget
- The 30/30/30/10 Budget
- The 60/30/10 Budget
- The 70/20/10 Budget
- The 50/40/10 Budget
- The 80/20 Budget
- The 60/40 Budget
- The Envelope Budget Method
- The Zero-Based Budget
- The Reverse Budgeting
- Extreme Budgeting
- Digital Envelope System
It's crucial to understand your individual needs to determine which budget is best for your situation. Then, you can try one budget style, and if you think it's not working, you can attempt another one.
What Are The Advantages Of Budgeting?
In summary, the advantages of budgeting are that it helps you get money under control, understand your spending habits, prevent overspending, get you ready for any financial emergencies, help you get out of debt, and make you closer to achieving your financial goals.
Budgeting Gets Money Under Control
Budgeting is an excellent way of getting all your money under control. According to the most recent Consumer Expenditure Survey from the US Bureau of Labor Statistics, the average monthly expenses for American households are $5,111.
Everyone should be spending less than they earn, so planning what you will do with your money every month after you receive your salary or any money is crucial to avoid debt. If you have more expenses than income, a personal budget is a great way to cut some of them.
I love budgeting my money because every time I receive my income, I split it into different amounts and allocate it to where I need it to go. This way, I know I fully control all the money, including income and expenses.
One woman in London saved $24,000 in one year by cutting unnecessary spending and only paying fixed costs like mortgage, utilities, insurance, cell phone, and basic necessities like food, cleaning products, and toiletries.
How often do you need money that you don't have and have to wait until you receive your salary again? With a budget, you decide where your money goes before spending it and what dates your bills are due.
Budgeting Helps Understanding Your Spending Habits
Having a budget helps you control your money because you will plan what you will do with it, but it also helps to understand where you actually spend every dollar.
Some people don't know how they spend their money or think they pay a lot less than they do. For example, you may think you spend around $150 eating out every month when you actually spend $300. That's twice the amount you thought you were paying.
I know someone who pays a subscription of $11.99 for a streaming product they don't use. I asked why, and the person said, “I might need it one day.” That's $143.88 per year that is being spent unnecessarily. Don't pay for things monthly that you don't use or barely use it. If you use more Netflix than Amazon Prime, cancel the second one, or vice versa.
When budgeting, you know all the money you need to spend monthly. For instance, if you receive $3,000 per month, you know you need $1,000 for rent, $400 for groceries, $100 for the water bill, $150 for energy bills, $100 for car insurance, etc. The more specific you are with your expenses, the better you can control them.
Budgeting also allows you to cut some expenses you don't need or at least reduce them to save money, and that's how you stay or get out of debt. It allows you to discover how much you are spending unnecessarily every month.
Budgeting Prevents Overspending
We've all had months where we spent more money than we received. It can be because an emergency appeared, you bought something impulsively, subscribed to something you don't need, eaten out more times than you should, paid for an expensive car or mobile insurance you don't need, etc. Having a budget can help correct these mistakes and fix these bad spending habits.
Do you really need to eat out five times per week, change your mobile phone every year for a new one, or buy multiple expensive clothes every month? If you can afford it, go for it, but if you are struggling with your money and keep overspending, you need to think twice about this financial behavior.
If you spend more than you have and pay with a credit card, you will pay fees that could be allocated to other areas of your life. Budgeting will help you assign your money better, cutting unnecessary expenses and preventing you from overspending.
Budgeting Helps Getting Out Of Debt
Overspending your money will leave you in debt. You know budgeting can help you cut any overspending and indirectly can also help you get out of debt quickly since you can correct any spending mistakes you are making.
It's so easy to get access to credit and borrow small amounts of money that you run into the trap of overspending, and sometimes it takes years to pay it back (or you are still in a situation where you never recovered again).
When you create and stick to a budget, you can save more money since you cut expenses. You can use this extra money to pay any debt and secure financial freedom. Eventually, you will be out of debt and see your savings account bigger, allowing you to invest that money. All thanks to budgeting.
Budgeting Helps Prepare For Emergencies
Life is full of emergencies and expenses that you are not expecting, and that's why budgeting will help you prepare for any crises since it will enable you to cover those expenses.
You can't anticipate everything. For example, you don't know if you will have to stop working due to a medical problem, fix your car because it stopped working, or you had an accident, make an urgent repair in the house, or even lose your job.
Unplanned expenses can ruin a positive financial plan and year very quickly. Therefore, it would be best to plan how long you could pay your costs without receiving any income. Budgeting can allow you to save money and prepare a six-month fund for any emergencies you have.
Budgeting Helps You To Achieve Your Goals
Budgeting is why I keep achieving my financial and life goals since I plan most things. Because of budgeting, I learned how to save money to buy my dream house, pay all my debt and have financial freedom, and even live in different locations every couple of months.
If you are smart about your money and budget it right away, you can achieve your goals because you will stay financially focused on what you want to accomplish.
You learn how to spend your money based on your priorities. Whatever it's not on your budget, it means that it's not a priority, so you don't spend the money on it.
If you want to save $10,000 to go on your dream holidays, save up until you achieve that amount, and don't buy unnecessary things like expensive clothes or eat out every night. You will avoid any expenses that aren't on the budget to focus on what you want to achieve.
What Are The Disadvantages Of Budgeting?
On the other hand, the disadvantages of budgeting are that it is difficult to find the proper budgeting method for you, it takes time and effort, it doesn't see results quickly, and it can be inaccurate, mechanical, rigid, and stressful.
Finding The Right Budgeting Method
Sometimes people decide they need to budget, but then they get stuck on what budgeting method to choose. It could be trial and error until you find the right one for your needs, which can waste your time figuring out and demotivate you from budgeting.
For example, if you have different expenses every month, or your income is never the same and varies a lot, that can influence your budgeting style. If you get paid weekly, you may need to budget weekly to be more accessible.
I like to use budgeting and running as an analogy. When you start running, you will keep trying different running shoes until you find the perfect one for your running style. The same happens with budgeting. I encourage you to keep trying other budgeting methods until you find the perfect one for you.
Budgeting Takes Time And Effort
You will definitely not get your budgeting right on the first attempt since you will forget some expenses. Some people are not very realistic when budgeting for the first time. You need to understand that this will take time and effort.
That's why some people give up on budgeting after one attempt. They become frustrated and think budgeting is not for them since they didn't see any financial improvements.
Decide if you need a flexible budget structure or a rigid one. Then go for the initial setup where you need to review all your bills, check your bank statements, add your income, create budget categories, think if you want to cut all unnecessary expenses at once or gradually, etc.
Also, you should review your budget on a monthly basis to check what worked and what didn't, since at different times of the year, you ask for other expenses.
Budgeting Results Don’t Come Quickly
As you know, budgeting takes time and effort, and the results don't appear fast enough for some people. The problem with this is that some people will lose their motivation to keep a budget.
Most people focus on the long-term goal, so sticking to the budget because they're process-focused can be pretty tricky. Just remember that if you stick with your budget because it's working, you will eventually reach your goals.
Budgeting Is Often Not Accurate
This may be the number one reason why most people quit budgeting. Sometimes, or maybe always, if you are not super realistic, budgeting is inaccurate.
When budgeting, you have to remember that you are making predictions and estimations on how much you will spend based on your current information. You can pay $800 in rent, but you can pay more if the spread increases. Or maybe you always put $200 worth of fuel in your car every month, but if the price of fuel increases, you'll have to put in more, spending more money than expected.
It can also be very challenging for freelancers to budget since you are never sure about your income for a particular month. It's not easy to budget with guessing information. My advice is always to estimate less than more.
Budgeting Is Mechanical And Rigid
Many believe that budgeting is a mechanical and rigid method that cuts your freedom. You have to live a strict life guided by a budget that dictates where and how much money you can spend.
I can see how some people might see this as a downside. Imagine you want to go to your favorite restaurant, but your budget says you've already spent the monthly limit for eating out that month. That can feel constricting at the time. Yet this is why I see budgeting as an advantage since it keeps you from overspending and controlling your expenses.
Budgeting Can Be Stressful
Building a new habit can be pretty stressful since it involves you using your willpower to override those impulses. For example, when it comes to budgeting, you need to use your willpower to stick with what you decided at the beginning of the month and not spend unnecessary money.
Like anything in life, when you start a new habit, it doesn't mean that you can switch something on your mind and stick with it. That's why budgeting is so stressful sometimes because you have an internal battle to not spend money on things that are not in the budget.
I can guarantee that you will not always follow the budget 100%, making mistakes. Keeping all expenses tracked can also be complicated, so building these habits takes time. At some point will be automatic for you to do everything you need, but not at the beginning.
If you live with a partner, parents, or other family members, it can be pretty stressful to have everyone on the board with a budget plan. As I said, changes are not easy, especially when they implicate money.
There are both advantages and disadvantages to budgeting. My opinion is that you should try it and check yourself if budgeting is the proper method for what you want to achieve. I also say that the advantages of budgeting surpass the disadvantages.
Budgeting is a significant first step for anyone who wants to put their finances in order. Getting out of debt, buying a house, or saving for something else, can be possible if you budget the right way.
Michael launched Wealth of Geeks to make personal finance fun. He has worked in personal finance for over 20 years, helping families reduce taxes, increase their income, and save for retirement. Michael is passionate about personal finance, side hustles, and all things geeky.