Why Budgeting Matters
Budgeting is most often viewed as a means to allocate one’s income to monthly expenses. You might view budgeting separately from saving, but they go hand in hand. How can you properly plan to save if you don’t know how much you need to cover the cost of living your life? Welcome to Budgeting 101 where I will teach you how to create a budget.
This is also the key to avoiding living paycheck to paycheck, which is a surefire way to land in retirement without enough to survive or, even worse, never having the ability to retire.
CNBC recently reported that 63% of employees are unable to cover a $500 emergency expense. The same article mentions that 35% of Americans making greater than $100,000 are living paycheck to paycheck.
These are very scary statistics. If you are making $100,000 and unable to save any money, you are likely doing something wrong. If you don’t have enough savings to cover a $500 unexpected cost, you are most certainly not living within a budget. All of this is tied to bad habits and living a lifestyle that does not match one’s income.
This is where a budget can and should come in.
How a Budget Helps Control Spending
A budget forces you to look at expenses and plan your life accordingly instead of blindly spending money with the hope everything works out.
This latter approach rarely works. It often leads to debt and financial holes that become increasingly difficult to escape.
At my job as a Chief Financial Officer, I constantly see employees taking hardship withdrawals from their 401(k) to cover non-critical expenses. This was also discussed in that same CNBC article.
A few years ago, when I worked in the mortgage industry, I regularly saw people refinancing their homes to take advantage of equity but then spending that money on luxury items instead of something that would benefit them later.
Please note that life is short and you should absolutely have fun. I am not saying every penny you earn needs a long-term purpose. I certainly have not lived my life that way.
However, you should plan and budget for the things you want in life.
Budgeting Applies at Every Age
If you are young and reading this, you might think this topic does not apply to you. In reality, it absolutely does. Budgeting simply looks different depending on where you are in life.
If you are really young and saving to buy something like headphones, an Xbox, or even some Taylor Swift merch, you can ask your parents what you can do around the house to earn money and start saving.
My daughter saves the money she receives for birthdays and holidays so she can buy things she truly wants instead of immediately spending it.
If you are a teenager hoping to buy your first car, budgeting can help you save enough money to make that goal a reality.
Understanding Your Expenses
Budgeting allows you to make smarter financial decisions. If you understand how much money you need to cover your expenses, you can make better decisions about what car you can afford or what type of vacation fits your budget. Better yet, you can start saving for those things ahead of time.
Many people live paycheck to paycheck because they never think this way. Money comes in and goes out without realizing that money spent on an expensive dinner may have actually been needed for basic living expenses.
For example, if your rent is $2,000 per month and you get paid twice per month, $1,000 of each paycheck should be set aside to cover rent. This is Budgeting 101.
Planning for All Expenses
Most people who attempt to budget fail because they only think about their monthly bills. They forget to account for all of the expenses that occur throughout the year.
Ask yourself questions like:
- How much do you spend each month on gas?
- How much do you spend on groceries?
- What about car insurance?
- Do you pay for a gym membership?
- Do you spend money on dry cleaning?
Some expenses only appear once or twice per year, such as property taxes or vehicle registration.
If you own a car, it will eventually need repairs. If you own a home, something will break. These are not surprises—they are expected costs of ownership.
When you truly account for all of your expenses, you will see how much money remains. That remaining amount can then go toward entertainment and savings.
The Envelope System
My first exposure to budgeting came from watching my mother use an envelope system when I was growing up.
Each payday, my mom would go to the bank, cash her paycheck, bring the cash home, and place different amounts into envelopes designated for specific expenses.
- Gas
- Groceries
- Household expenses
When she needed to fill up the car, she would take money from the ‘Gas’ envelope. It may sound old-fashioned, but it worked incredibly well for her and helped her avoid using credit cards.
If she did not have the money available for something, she simply didn’t buy it.
How to Start Your First Budget
If you want to make a change and try budgeting, the first step is understanding where your money goes.
Start by reviewing:
- Your bank account history
- Your check register
- Your credit card statements
Focus on the necessary expenses first. Luxury items like dining out, entertainment, and vacations should come after you determine how much you need for essential expenses.
Even necessary expenses like groceries can sometimes be adjusted. For example, if you spent $1,000 per month on groceries last year, you might be able to reduce that to $800 or $900 by comparing prices or using coupons.
Creating a Budget System That Works
The biggest mistake people make is looking at their checking account balance and assuming that is the money they have available to spend.
In reality, some of that balance is already needed for upcoming expenses.
Years ago, I solved this problem by building a spreadsheet that allocated my paycheck to every expense I needed to plan for.
Because I am comfortable using Excel, this spreadsheet effectively became my check register. It showed me my total balance while also showing how that money was allocated for upcoming bills.
More importantly, it helped me identify areas where I was overspending.
Conclusion
Budgeting does not need to be complicated, and it certainly does not need to be perfect. The goal is simply to understand where your money is going and make sure it aligns with the life you want to live.
Too many people go through life reacting to expenses instead of planning for them. When that happens, unexpected costs turn into financial emergencies and saving for the future becomes almost impossible.
A budget flips that process around. It allows you to plan for the things that matter—your housing, your family, your hobbies, your vacations, and your long-term financial security.
Whether you use a spreadsheet like I do, an envelope system like my mom used, or one of the many budgeting apps available today, the important thing is simply to start.
Once you understand where your money is going, you can begin making better decisions about how to use it. And that is really what Budgeting 101 is all about.
