Having a budget can be great for your personal finances in so many ways.
Not only does having a budget mean you are in control, but it also means that you are making conscious decisions about how you spend your money on a day-to-day basis.
The simple fact is that most people have no idea at all what they are spending their money on, but then they wonder why they are struggling at the end of the month before their next pay check comes in.
If you don’t track your spending and budget effectively, you are at risk of overspending, going into debt or, even worse, not achieving a high enough savings rate to achieve Financial Freedom.
Here are 7 reasons why you should have a budget and track what you are spending:
If you don’t have a budget and you just spend money on a whim, you are not really in control of this. If you just buy things on impulse, without thinking about the impact on your wider finances, then this could land you in financial trouble.
That morning coffee you buy on auto-pilot every morning might seem like ‘only’ $3 today, but over a month or a year, this can add up to some serious cash.
If you create an effective budget and then track your spending on a regular basis, this means that you are in control.
When you set out at the start of each month what you want to spend on different categories (food, leisure, gas etc), you are far more likely not to over-spend.
Most people simply have no idea what they spend their money on. If I asked you how much you spent on gas or the groceries last month, would you know the answer?
How about if I asked you how much you spent on transport in the past year?
If you don’t know how much you are spending, then how are you supposed to control it?
When people do a budget for the first time and start tracking their spending, they often have a couple of ‘HOW MUCH?’ moments.
This is when they realise how much money they have been wasting on things that they really didn’t need or that don’t really bring them much happiness.
Some common examples of ‘HOW MUCH’ expenditure items are lunch at Starbucks while at the office and online clothes shopping sites.
When you start to realise just how much you are spending on things, you can then make a more conscious decision about what deserves your hard-earned money and what simply doesn’t.
This is a big one!
If you want to achieve Financial Freedom, a high savings rate is a must!
Your savings rate is the percentage of your income that you save each month.
For example, if you earn $1,000 and save $100, you have a savings rate of 10%.
Many people without a budget don’t save anything at all. They spend all of their money and then wonder why they have nothing left at the end of the month, but they don’t really know what they are spending their money on.
If you create a budget, you can start to see areas where you can increase your savings rate. Sometimes, this can be achieved without any change to your lifestyle at all.
When I did my first budget, I realised that I was spending a lot on ad-hoc train fares, and it would be much cheaper to buy a yearly season ticket. This saved me over $800 a year and had no impact at all on my day-to-day life.
If anything, it has made my life better, because I now have unlimited train travel and I don’t have to worry about the cost.
Finally, if you want to get serious about Financial Freedom, you should always pay yourself first.
This means that you put money into savings at the beginning of the month and treat your savings payment just like your mortgage or rent payment – it has to be made - no excuses!
If you pay yourself first, you put your savings on auto-pilot and remove the temptation to spend money and then regret it later on.
If you are not familiar with the concept of paying yourself first, you really should read Rich Dad, Poor Dad!
If you are struggling with debts, having a good budget and knowing what you are spending can be a great way to get things under control.
By tracking your spending, you can start to look for ways to reduce your outgoings each month.
Every dollar you save is an extra dollar that can go towards paying off your debt.
Once you know how much you can put towards your debt repayments each month, you should check out this post on the Debt Snowball vs the Debt Avalanche to see which method of debt repayment is best for you.
When you start to think about something on a regular basis, the mind has a fantastic ability to start making things change.
This is the reason that goal-setting exercises are so effective. By taking time to think about your goals and by visualising the outcome you are looking for, the mind goes to work on making it happen, even when you are sleeping!
Dan Sullivan from Strategic Coach has a fantastic quote:
“Our eyes only see and our ears only hear what our brain is looking for”
When you create a budget and start tracking your spending, you will automatically get more intentional in how you spend your money. This happens on both a conscious and sub-conscious level – pretty cool huh?
Having a budget can actually be pretty fun if you make it into a personal challenge.
Lets say you are down to the final $5 of your ‘eating out’ budget but then your friend calls up and asks if you want to go out for dinner.
You could just think “nah, I can’t afford it”, but where’s the fun in that?
Going out to dinner is fun, but if you want to be really strict with your budget, you have to find a way to make it happen for $5. How is that possible.
Usually, there are 2 choices:
Or, even better:
Sometimes when we are focused on Financial Freedom and increasing our savings rate, we can get a little wrapped up in the whole thing to the point where you start to feel guilty about spending money on fun things like holidays and eating out.
This is not the plan.
If you have a budget where you set aside a certain amount each month for fun and leisure activities, when you go ahead and spend that money, you often feel a lot better about it.
You know you are spending money that you can afford to spend and that you are ‘allowed’ to spend this money on fun stuff!
So there we have it, 7 reasons why having a budget and tracking your spending is a great idea.
If you need help with your budget, you can grab my free budget tracker by clicking here.