Budgeting is the process of planning how to spend your money wisely. Why is budgeting important? Because it allows you to determine if you have enough money to do everything you want in a specific amount of time (usually during a month).
Basically, if you don't find a balance between your income and expenses, you will be in trouble because you will spend more than you make, getting deeper into debt every month.
I always say if you don't have money to do everything you would like to do, it's because your income is too low or you are not budgeting correctly. The first one seems easy, right? If you are not happy with your payment, try to find another job/company that pays you more. If you do receive a good salary, you just need to learn why budget planning is so important.
Let's look at some reasons why budgeting is essential.
Why Is Budgeting Important?
Budgeting allows you to create a spending plan to control your money better, ensuring you have money for things you need and want. A budgeting system helps you achieve your financial goals, save money, get out of debt, prepare for emergencies, relieve financial stress, and keep you organized. It prevents you from overspending, feeling financially overwhelmed, and improving your overall life quality. Budgeting can also lead to a happier retirement and marriage.
A budget can bring many advantages to your life, so why not try it now?
1 – Budgeting Gives Your Control Over Your Money
The best thing budgeting will do for you is you will gain control over your money. When you do that, you can start managing your life better. For example, without budgeting your money, could you tell me right now how much you spend on basic needs, how much money you save, or do you know the cost of going out every month? You are not even sure if you are spending beyond your means.
Most people will say they have a general idea about how much money they can spend every month, but you may be surprised by how wrong you can be. Just imagine, today you buy lunch at work, three days ago you bought a jacket, and tomorrow you decide to go for drinks with friends. When you realize you spent $300 you didn't plan to.
Spending $300 a month that you didn't plan for is a lot of money that could be put to good use in other areas. You may think that one single purchase will not affect your monthly money, but how many “single purchases” do you have per month? They are more than you realize if you check them now on your bank account.
When budgeting your money, you can:
- Have an accurate view of your bills.
- Manage how much money you are spending.
- Control how much money you are saving.
- Handle how much money you are investing.
- Have a plan for your money.
I always felt I couldn't do what I wanted with my life because I didn't have the money to do it. So when I started to budget my money, I started to allocate funds to things that would change my life for the better, which worked pretty well for me. I went from a job that I hated in a country I was not too fond of their lifestyle to working for myself in a country with nice weather and beaches.
This site exists because of the way I budgeted my money. Now did all my life change for the better because I started to budget my money? No, but it was the first step for me to do so and control my life.
2 – Budgeting Helps You Achieve Your Financial Goals
Spending money without a plan is never a great idea. When you have a budget, you can decide how much money to save and what you will do with it. That's why you need to set financial goals to motivate you to save and invest.
When you don't have goals, you will not save money and will spend all your paycheck month after month. Even if you save $200 every month, if you don't have a specific goal on why you are doing it, you will spend that money sooner or later.
Now, if you set money aside because you want to buy a house, a car, go on your holidays, etc., you will have your mindset shifted for that specific goal and save money. It's also essential to establish when you will spend the money. For example, your financial objective can be, “I want to save $300 in the next five years to make a down payment on a house.” This is an excellent example because you know how much you need to budget and work toward it.
Budgeting with financial goals can:
- Map out your financial plans (save, invest, cut expenses).
- Keep track of your money and goals.
- Make you work toward your goals.
- Make you achieve your objectives.
To achieve your financial goals, you need a plan to stay focused and achieve what you want, and that's where having a budget is so essential.
When I decided to create my first website, I lived in London and had rent, bills, and a costly subway pass. I had to allocate money to web hosting, WordPress theme, plugins, online courses, legal templates, etc. It was only possible because I budgeted the money intending to buy all those things to build my first online business. I had a plan on how much I needed to invest in the business every month and for how long.
During that time, I didn't buy branded clothes, eat out multiple times, or go to drinks with friends every Friday night. I allocated my money to my financial goals, and you can do exactly the same.
Examples of financial goals:
- Buy a house
- Pay debt
- Invest your money
- Build good credit
- Save for retirement
With a budget, you can focus your money on what is most important for you and your future.
3 – Budgeting Helps You Save Money
Most people start budgeting because they want to save money for a specific purpose. According to a study made by the University of Arizona, millennials who buy less and save more are happier. I have given you a few examples above related to saving your money. Let me give you another one.
When I decided to buy my first house, I had no savings (they were all allocated to my first business). I knew the house I wanted was around $332,000, and I needed to have £32,000 (10% of the house) plus $18,000 for other purchasing expenses. So I needed to save $50,000. I wanted to buy a place in the next two years, so I had to save around $2,100 every month to ensure I could buy a house.
I only purchased that house because I knew exactly how much I needed to save every month. When you create a personal budget, you know how much money you can save every month and what expenses you need to cut to save even more money. Maybe you don't need a cable plan with 300 channels, buy branded clothes every month, or three different entertainment subscriptions?
When you budget your money, you can save enough to:
- Pay debt
- Create an emergency fund
- Purchase something expensive
- Starting a business
People that don't have a budget tend to save less money. You should check the 60/30/10 rule budget if you have a decent income and your goal is to save most of it.
4 – Budgeting Stops You From Overspending
Why is budgeting important? Because when you have a budget system in place, you know exactly how much money you have in and out, preventing overspending.
If you have a tight budget that is only enough to pay your essentials like rent, groceries, and utility bills, you know that you can't spend money on eating out frequently or buying clothes all the time. Without a budget, you may be overspending without even realizing it.
I always advocate that budgeting helps you make knowledgeable decisions when considering new purchases, memberships, or subscriptions, preventing you from overspending, especially on things you don't need. For example, don't use an overdraft to pay for something you want but don't need because you think you can pay next month. If you have an emergency or lose your job, you risk getting into enormous debt very quickly.
One of my friends always complained that she was overspending every month and paying more and more on her credit card. Because she is a freelancer, she didn't know her income well and was getting less money than she thought, leading to overspending between $120 to $340 for the last seven months. Unfortunately, she only realized this when we both sat down and created a budget for her next month.
Having a credit card is excellent for your credit score but very bad when spending money you don't have (as you should know), which takes us to the next point.
5 – Budgeting Helps You To Get Out Of Debt
People that don't budget tend to save less and get into debt more quickly. Therefore, budgeting plays a crucial role in helping you avoid or get out of debt. If you budget your finances, you have a plan on how to spend your money, so you don't overspend and go into debt.
It's essential to understand the difference between good and bad debt. The first one is anything that increases wealth directly or indirectly, like a mortgage, a student loan, or a business investment. The second one is anything that doesn't increase wealth, like purchasing things you don't need but want. For example, buying an expensive brand new TV on your credit card that you probably don't need.
So when you start budgeting your money, you will identify which debt you can pay quickly and if you can make additional payments (you will save money on interest if you pay your debt earlier). On the other hand, if you fail to make a payment on your credit card, I guarantee your bank will raise your interest rate.
I had a situation in my life where I ended up with a lot of debt under my name (that's why you don't do this kind of favor to anyone), and I had to pay thousands of dollars to seven different companies. The only reason I could settle this debt was that I budgeted my money and paid more than the minimum payments. I know it would take me more time to pay all that debt without a budget system in place.
The rule with budgeting is if you can't afford it, you will not buy it.
6 – Budgeting Helps You Prepare For Emergencies
According to Bankrate, less than half of Americans have savings to cover a $1,000 surprise expense, and around 25% don't have an emergency fund. If something that 2020 taught us is that an emergency fund is a must because you can never predict the future.
With life getting more expensive every year and salaries not keeping up with inflation, it becomes increasingly important to have an emergency fund. You never know when gas, water, electricity, or essential foods like bread, milk, vegetables, or fruits are going up without notice.
Imagine an unexpected bill, baby, or an event like a car accident, illness, or injury. For example, in 2021, my dad had an accident at work and had brain surgery (everything went very well), so he didn't get his pay for four months and was on sick pay, which didn't cover half of my parents' rent.
They didn't feel financially burdened because I taught my parents the budgeting importance of having an emergency fund and saving money (I set up a certain amount of money to be transferred from their account to a savings account every month). As a result, they had the money to face those months when their income was much lower.
Even if you put all your extra money into paying a debt, always have a small amount to go to an emergency fund, even if it's $50 every month. This action will give you some peace of mind.
7 – Budgeting Leads To A Happier Retirement
Budgeting can lead to a happy retirement because you know you are saving money that you will have when you stop working.
Many people spend all their money without thinking about the future, and they end up working when they are over 70 and 80 years old. Can you imagine yourself working at that age?
It's important to make monthly contributions to your IRA, 401(k), or other retirement funds. It may not sound important now, and you want to spend all your money when you are young, but you will be happy when the time comes. It's better to spend your retirement enjoying life than working in your local restaurant because you didn't save enough money.
Budgeting can help you plan how much money you need to set aside every month to have the amount you desire when you retire.
8 – Budgeting Can Help Your Marriage
According to Investopedia, the two top reasons couples fight are money and sex. Your budget plays a fundamental role in keeping you and your partner on the same page since planning your financial future together may bring some obstacles.
The biggest problem when budgeting your money in a marriage is that two people can have different plans for what to do with the money. For example, one may want to buy a bigger house, and the other wants to save as much as possible for retirement. One spouse may like to manage and plan what to do with the money, and the other has no interest in planning but likes spending and living in the moment.
When you budget as a couple, you both sit down and understand how much money is entering your bank accounts and how much money is leaving. Then you can discuss what to do with it. Of course, no couple will agree 100% with what the other wants, so giving in some areas is essential.
Budgeting keeps money from becoming an obstacle in any relationship since it's something you both agree on at the beginning of every month to follow, setting ground rules for how to handle the money.
9 – Budgeting Relieves Financial Stress
Why is budgeting important? Because budgeting is excellent for keeping you from feeling financially overwhelmed. Since you have a budget, you know exactly how much money you earn and how much you can spend in every area of your life. This way, you will always be well-prepared for any expenses, including unexpected ones.
Can you remember the last time you weren't stressed about not knowing if you'll be able to pay all your bills and still have money to eat? If you have a budget system in place, you will know precisely the answer to those questions.
Don't focus on your family and friends' way of living. Instead, focus on your finances and live by your meaning. Remember, some people have a way of living well beyond their meanings and have a lot of debt to maintain a particular image and status. You don't want to be those people, and when you lose focus on what others have or do with their money, you will encounter what it's like to be financially content.
Many people have massive amounts of debt and feel very depressed and anxious because they think there is no solution. Remember that you need to face your money problems one step at a time. Budgeting your money will help you establish a plan to relieve the financial stress and gain control over your economic life (it can take a long time, but you will feel less overwhelmed each month).
10 – Budgeting Keeps You Organized
Personal finance and disorganization are words that don't mix well together. If you have no idea where you are spending your money and how much, how can you keep your finances organized?
Do you know how much you spend per month on shopping? How much do you spend eating out? How many dollars do you spend on fuel monthly? If you can't answer any of these questions in a few seconds, you have no idea about your finances.
It's much easier to live on a budget and keep all your finances organized than to be stressed because you don't know why you end up in an overdraft or without any money every month. How can you save money for what you want or invest in a new business if you don't have your finances organized? It's impossible.
11 – Budgeting Improve Your Overall Quality Of Life
Why is budgeting important? After everything you have read, you can say that you will improve the overall quality of your life when you have a budget in place. In addition, it can help you build the financial freedom you are seeking.
The difference between living paycheck-to-paycheck to now, where I have complete control of my personal finances, was that I started budgeting my money. Without a budgeting system in place, I wouldn't have been able to purchase my dream home or even start my own business as I did.
Since I started to budget my money, I have accomplished some of my financial goals. I don't feel financially stressed or anxious. I know how much money I am saving, and I don't overspend it. I am in complete control of my finances, and you can be, too, if you start budgeting as soon as you can. Today would be a great day.
Common Questions About Why Is Budgeting Important
These are the most common questions about why is budgeting important.
What Are The Five Reasons Why Budget Is Important?
You have a lot more than just five reasons to budget. However, if I had to pick up five reasons why it is essential to budget, I would say that budgeting gives you control over your money, prevents you from overspending, helps you save money, helps you get out of debt, and relieves you from any financial stress.
Why Is Personal Budgeting Important?
Personal budgeting is important because it helps you balance your expenses with your income, create a plan to control your finances, and help you to live within your limits. When you budget your money, you can achieve your financial goals and change your life. If you don't budget your money, you may spend more than you earn and find yourself in debt.
Why Is It Important To Create A Budget As A Teenager?
Every teenager needs to have a budget and learn how to control the money they receive from their parents. If teenagers spend all their monthly cash and their parents give them more, they will do the same in adult life with credit cards. As a result, teenagers will not understand the budgeting importance of managing money and will have bad debt in adult life.
Why Is Budgeting Important For Students?
Students usually have a tight budget for accommodation, food, and books and need to budget their money very carefully not to spend everything partying with their friends and colleagues. If students understand how much they have to pay for their needs and how much is left for their wants, they will find the balance they need to not worry about their finances and focus on achieving their academic goals.
Why Is Budgeting Important When Planning An Event?
Budgeting is perhaps the most critical phase when planning an event because it will let you plan ahead on where you will spend the money and adjust to the areas you need. For example, can you imagine if you spent all the money on the place of the event and then you didn't have money for food and drinks? It would be a total failure.
Conclusion On Why Is It Important To Have A Budget
Why is it important to live on a budget? Because otherwise, you don't know what you are doing with your money, leading to overspending and debt. Just imagine a life where you actually achieve your financial goals and don't feel financially overwhelmed.
It doesn't matter which budget technique you choose. What matters is that you start budgeting today. Control your money, control your life.
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.