5 Reasons Why You Need a Budget!

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If I asked you to tell me how much you spend eating out or buying gas each month, could you tell me? What about your household’s true cost of living?

This is the most basic reason you need a budget: To be able to plan and track where your money goes! Most people who I speak to about their finances have no clue how much they spend on a monthly basis. All they know is that by the end of the month, their bank accounts are nearly empty and they are waiting for their next paycheck.

Even if you don’t find yourself scraping together pennies at the end of the month, you still need to have a budget in place. In order to take control of your finances you need to come up with a plan. This means assigning a job to every dollar that you receive before you ever receive it.

How? You need to create and update a budget in order to plan and keep track of your spending. This goes both ways – if you don’t keep track of your spending, then creating a budget is pointless. You have to periodically evaluate your spending to ensure that you are staying on track.

Why You Need A Budget

Budgeting - You Need A Budget

You Need A Budget To Accomplish A Financial Goal

It will be nearly impossible to accomplish a financial goal without a budget – of course it can be done, but with a lot more hassle and waste. With a budget, you can allocate a specific amount toward your goal – whether it be savings or debt repayment – and ensure that it is reasonable.

It will also be easier to accelerate your plan by reducing spending in one or more areas and funneling that money into your “main goal”.

If you look at our 52-week savings challenge results, you’ll see an example of how budgeting can help you reach a financial goal.

You Need A Budget To Help Handle “Shocks” To Your Finances

If you find out today that your job will be cutting your salary, or implementing furloughs (mandatory, unpaid days off), how would you handle it? Would you be able to make the necessary adjustments?

If you keep track of your spending (which will be necessary to follow a budget), it will be easy for you to make these adjustments. You will be able to look at every area of spending and determine where you need to cut back – or even if it’s worth it to try to increase your income.

Learn how to set up a financial contingency plan (and no, it’s not as simple as having an emergency fund)!

You Need A Budget To Identify Areas Of Waste

Waste Money

Most people who make small daily purchases (like coffee, breakfast, or lunch), are shocked to see how much they’re really spending in these areas. It’s easy to spend $5 on a cup of coffee and a bagel in the morning, $3 on a candy bar and soda from the vending machine, and then spend $6-$10 on lunch without even thinking about it.

However, if you have established a budget, it will become increasingly difficult for these expenses to escape your attention.

The first month after you set up your budget will probably be a big eye-opener for you (it definitely was for me). Remember that coffee, candy and lunch from above? You would probably budget about $50 or $75 to that category. However, 22 days (the typical amount of work days in a month) of that type of spending will cost you nearly $400 every month!

Committing to (and adjusting when necessary) a budget will help you to evaluate this type of spending and decide if you should divert money from another category, or change your habits!

You Need A Budget To Ensure That Any Surplus Is Not Spent On Frivolous Items

Similar to looking for areas of waste, this will call for you to identify areas where you can reduce or eliminate spending. Once you allocate your income across living expenses, giving, debt repayment and savings, you may find that you have money left over (a problem that we all would love to have).

Instead of this money just being absorbed into your spending (something that usually happens without a budget), you will be able to give this surplus a new assignment. This, of course, depends on your exact situation and level of risk aversion.

You may choose to give more, accelerate your debt repayment, increase your savings, or master your investment strategy. The point is that having a budget will easily allow you to identify these opportunities.

You Need A Budget To Help Develop Discipline In Multiple Areas

Value of Time

This is accomplished in a few ways. First, you are forcing yourself to tightly control your spending, which will call for discipline – especially if this is the first time you have done this.

Secondly, by constantly monitoring your finances and having to make small adjustments, you are more aware of every financial decision you make.

By holding yourself accountable for every dollar that you spend, you will tend to evaluate your free time in the same manner. For instance, you will begin to consider the value of your time in terms of money and lost opportunity, which may cause you to re-evaluate your decisions.

These are just some of the reasons why you need to develop a budget. Over the next few days, we will look a few painless steps you can take to create a budget, and also to change your thinking about money!

Read The Rest Of The Series

Reader Questions

  1. What are some of the benefits that you see in having a budget?
  2. How often to you review your spending to ensure that you are within your budget?
  3. Have you ever discovered that your budget was unrealistic?

I look forward to your comments.

Budgeting is Hard, But Here Are 8 Tips to Make It Easy!

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[The following post has been brought to you in conjunction with Credit Sesame.]

Sticking to a specific budget is not always easy. From holiday spending to emergencies to everyday purchases, the household budget can easily fall to the wayside. If this sounds familiar, you’re not alone. Simply relying on willpower and discipline for your budgeting is hard.

What really works is automating what you can and getting smart about where you spend your money. Here are 8 tips you can try to help yourself stay on track.

8 Easy Budgeting Tips You Can Use TODAY

8 Easy Budgeting Tips

Use an App to Track Spending

If you already have your phone in hand, why not download an app to track all of your spending? Many banks offer free budgeting tools, based on debit card transactions. Log in to your account and take a look.

Free apps like Mint can also show you exactly where your money goes, separating transactions by category in easy to understand tables and graphs. You can visually see where you spend too much and make adjustments.

Auto-Pay Your Bills

It can be tempting to pay a bill late in order to buy something else. However, putting bills first by auto paying them can eliminate that temptation and keep you on track. Even if you normally pay your bills on time, it is easy for one to slip through the cracks. Then you might think you have more money than you do, and you could get hit with late fees and service interruptions.

Schedule an auto-payment date that works for you and sign up for electronic receipts (a notification or an email that the transaction occurred).

Automate Savings

Set up your direct deposit so that a portion of each paycheck goes straight to savings before you even see it. You can do this through your employer’s payroll service, or through your bank.  If you manually deposit your pay, it’s up to you to put the allotted amount into savings each time.

Save on Entertainment

Do you have expensive cable service but you rarely have time to sit and watch anything? I used to spend around $100 per month on cable but switched to Netflix for $10 per month.  You can also pick up movies, magazines and books at the local library for free rather than buying or renting them.

Also, check your local newspaper, the coupons that arrive in your mailbox and online deal sites for free or low-cost concerts, movies, and other events. A little bit of effort can lead to huge savings and an easier time budgeting.

Plan Meals

Food is often one of the most frequent, necessary, and expensive items in the budget. The temptation to swing through the drive-through can be strong. If you’ve already got a delicious dinner planned at home, the temptation is easier to resist. You can, of course, eat out sometimes. But it should be the exception, not the rule.

Google recipes. Start on your favorite recipe site or by typing in the ingredients you’ve got on hand, followed by the word “recipe.” (If you’re on a tight budget or new to cooking, we love this free cookbook.) Buy staples in bulk (olive oil, butter) to save money. Shop according to a list, not whim. Another word of advice: don’t shop when you are hungry or stressed. The key is to experiment so that you find recipes you and your family like.

Save on Gas

Gas is another expense you can cut down on by planning ahead. First, get the cheapest gas in town by downloading an app like GasBuddy that lets you search the city you live in for the best prices. Then think out all the errands you need to run and how you can do them most efficiently during the week.

When you know where you need to go, use Waze to find out about any problems on the road so you don’t find yourself stuck in traffic or taking a detour. Don’t forget about carpooling with friends when it makes sense. There’s even an app for managing your carpool schedule!

Negotiate Services

Are you paying monthly fees for your phone, car insurance, credit card interest, and bank accounts? In our competitive market, companies frequently change their offers and run promotions. They want to keep existing customers, which gives you leverage.

When paying my monthly phone bill, I asked about getting a discount on my services and learned they offered 15% off for AAA members. Just by asking I cut over $20 from my monthly bill.

Also, check your credit report to find out if you have improved, as better credit can help you get better rates, especially for products like insurance and credit cards. Credit Sesame is a great resource for getting free credit report cards.

Create Goal-Oriented Savings Accounts

Lastly, if you have a specific goal you want to save for like a vacation, the down payment on a house or an emergency fund, you can make that goal more tangible with a goal-oriented savings account. Put a name on the account and separate it from your other savings. Goal accounts can be strong motivators.

Sticking to a budget, repaying debt, and saving money can be hard, especially if you have never done it successfully before. Don’t get down on yourself about it. Instead, take action using tips like these to support your efforts and relieve some responsibility from your willpower.

How To Pay All Your Bills On A Low Income

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[The following is a guest post, offering tips/advice on being able to pay your bills even when on a low income.]

If you are a low-income earner, you may be struggling to make ends meet as everyday living costs continue to rise. It may feel like you do not have enough money coming in to help pay for all your bills each month. This can leave you stressed and feeling like you will never overcome your debt.

The good news is that no matter how much money you earn, there are effective steps you can take to get control of your finances and cover all of your expenses. Below is a look at some basic steps you can follow to track you money and pay all of your bills each month.

How To Pay All Your Bills On A Low Income

Low Income Debt

Track Spending

The first step to taking control of your finances is to start tracking where you are spending your money. Keep receipts or utilize online banking transaction summaries to review how you are spending your money.

Determine how much money you are spending in different categories, such as food, housing, utilities, transport, entertainment and miscellaneous each week. You may be surprise at where you are spending your money. This can then be put into a budget.

Set-Up a Budget

Using the information from above, creating a household budget based on your current spending habits. Look over this budget carefully, and determine in what areas you can cut back and spend less money. Now create a new budget using this new information and amounts.

Be sure to create a realistic budget that you will be able to stick to in the upcoming months. Creating an impractical budget may look good on paper, but will be impossible to keep. A poorly created budget can easily fail, resulting back to old spending habits and further financial issues.

Get Your Benefits

If you find after creating a budget that you do not have enough money coming in to cover all of your expenses, it is a sign that you may need additional financial support. Visit the gov.uk website and see if you and your family qualify for income support or other benefits.

These benefits are designed to help low-income earner offset some of the household expenses, so do not be afraid or ashamed to use these services. This may be just the extra amount of support you need to pay all your bills at the end of the month.

Have a No Debt Policy

Obtaining a loan, may seem like the solution to all of your financial problems, but if you are already having a hard time paying your bills an additional loan will only increase this problem. Make a commitment to establish a no debt policy and instead look for alternatives to borrowing money.

You should start by talking to your lenders and try to make payment arrangements, maybe securing an additional part-time job, or seeking help from a local charity or church.

Start Saving

Once you get control of your budget and start keeping track of how you are spending your money, you will be able to start setting a little bit of savings aside each month. Even if you can only save a little bit out of each pay check, it will start to add up over time. This will give you a safety net if an unexpected expense occurs or you have a loss of wages due to an illness, injury or loss of job.

These tips will help you be more accountable to your spending habits and help you set the necessary funds aside to pay your bills. You may also be alerted to the fact that you need to seek out some financial support because you do not have enough income coming in to pay all your bills. Together these steps will help you get your finances back on track, pay all of your bills, and hopefully start a savings account to protect your future.

When Extreme Frugality is the Only Solution to Your Money Problems

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These days, a certain amount of frugality is probably common in most households. Even if you make six figures, the high and rising cost of living forces making choices all the time. But there is frugality, and extreme frugality, and both have their time and place.

Frugality is largely a money management tool that we use to get more for less – as in, more of everything for less money. But when you have extreme money problems, extreme frugality may be the only solution.

This will move you beyond clipping coupons, eating home instead of in restaurants, or forgoing the annual family vacation. It’s the kind of frugality that could see you making major lifestyle changes. There is a time and a place for this kind of frugality, but even then, many people shy away from it.

Financial Crisis

Accepting Reality

Perhaps more than anything, extreme frugality requires accepting reality at the deepest level. If you’re in debt – to the degree that it threatens not just your lifestyle, but possibly even your survival – extreme frugality has to be on the table.

In order to get to that place, you have to embrace the idea that your situation is bad and getting worse. The only way you can fix it is through extreme methods. Many young people are prematurely facing just such a crisis due to outsized student loan debts.

Unfortunately, many people try to get around a debt problem by taking on more debt. It may be using consolidation loans to lower monthly payments, or simply getting more debt to allow you to make the payments on your existing debt. Either strategy is a recipe for disaster.

Getting Yourself Out Of Your Comfort Zone

In order to implement an extreme frugality strategy in your life, you must get out of your comfort zone. That’s not easy – many of us are deeply rooted in the suburban lifestyle. That lifestyle carries the expectation of a nice home in the suburbs, a car that fits our self image, and a lifestyle that, well…looks reasonably close to what we see on TV.

That lifestyle, while very comfortable, will not help you deal with a debt problem. The first order of business with extreme frugality is a willingness to let go of all of that. It’s freeing up your financial resources to the greatest degree possible so that you can fix the biggest financial problem you have.

Making Hard Choices

Very few people practice extreme frugality because it is a hard way to live, especially when compared to the suburban lifestyle. In order to make it work, you have to be prepared to embrace at least some of the following lifestyle changes:

  • Moving out of a house, and into an apartment.
  • Moving out of a house or apartment, and into a shared living arrangement with family or friends.
  • Trading a late-model car with monthly payments, for a “beater” that you own free and clear.
  • Giving up a car in favor of a bike, public transportation, or even walking (and moving to an area where you can).
  • Disconnecting yourself from the popular culture, because you know that it entices you to live beyond your means.
  • Giving up some high cost friends.
  • Giving up high cost hobbies and past-times in favor of simple pleasures.
  • Selling off possessions you can no longer afford to keep – including reducing the number of possessions so that you can live in a smaller space.
  • Buying what you need secondhand.
  • Taking a second job, or building a side business to increase income.

Each of these steps require making major changes in your life. They clearly move you beyond clipping coupons and canceling your cable TV service. But there may be times in your life when you need to make changes that are this radical. You certainly don’t have to do all of them, but just two or three could make a significant difference in your finances.

Embrace It – It’s Only Temporary

It’s easy to see why anyone would go to great lengths to avoid the effort that will be required in extreme frugality. But it may help if you see the situation – both the financial problem you are facing, and the steps you need to take in order to deal with it – as temporary. You will be making extreme changes in order to deal with extreme problems.

The Chinese have a saying – what doesn’t kill you, makes you stronger – extreme frugality won’t kill you either, and if it will enable you to solve your financial problems, it will definitely make you stronger. Two major benefits will come as a result of this effort:

Living on the cheap can be empowering. Once you realize how little you actually need to live, you’ll begin to see life in a very different way. This realization will be magnified by the indoctrination you get from TV. We see this glittering lifestyle that we feel compelled to live, but when you realize that you don’t need any of it, and you can survive and thrive, you’ll feel better about yourself and life in general. More tangibly, as you begin to overcome your financial problems, you’ll be able to save money and buy the things that you need and want without going into debt. If that isn’t empowering, than I don’t know what is.

And so will solving your own problems. These days, it seems as if everyone who has a problem is looking for a bailout. But anytime you can fix your own problems, your confidence and self-esteem grow in leaps and bounds. It’s a matter of developing self-reliance – and when you solve your own problems, that’s exactly what happens.

Implementing extreme frugality may not be pleasant, but if you view it as temporary you’ll be able get through it. And if you can see to the end, it can actually be empowering.

Would you consider extreme frugality if you absolutely needed to?