Recently a friend asked me a great question:
"Why should I budget my money? Why bother? I naturally live below my means. I have a bunch of savings and no debt. So why should I spend a couple hours each month crunching numbers?"
Hmmm. Well, that IS a good question. Let’s take a look at some of the reasons you should budget, even if you’re already in great financial health.
#1: Are You Saving Enough?
Sure, you’ve got savings. But do you have enough? Many people think they’ve got a comfortable cushion, but they don’t realize how expensive their future will be.
Your expenses in the future might be much higher than your needs today.
Maybe you want to get married – which could cost anywhere from $5,000 to $50,000. Maybe you want to have kids, which means you’ll need to start shelling out for daycare and diapers. Maybe you’ll want to send your kids to private school, which can cost anywhere from $5,000 to $30,000 per year. (Find out more about budgeting for a family.)
Simply stated: If you don’t know how much your goals are going to cost, you don’t know whether or not you’re setting aside enough.
#2: Optimize Your Finances
Budgeting makes it easier to optimize the way you invest your savings.
There are huge tax advantages to putting money in your 401(k) retirement account, your IRA, and your health savings account. There are opportunities to invest money in mutual funds, ETFs, index funds, REIT’s, or in more conservative bonds, TIPS, laddered CD’s and money market accounts.
You could use your money to flip houses or hold rental properties. You could buy a small business or provide the start-up capital for a new company.
All these options have different levels of risk. These choices appeal to people with different skills and interests. But the bottom line is that there’s no limit to what you can do with your savings.
But if you’re not budgeting, you don’t know how much money you’re saving and you don’t know how quickly your savings are going to grow.
#3: Helps You Pay Attention to Money
Your weekly or monthly budgeting practice helps you focus on your finances. Once you’re paying attention to money, you’ll be more likely to make even wiser choices about how you spend, save and invest.
#4: Discuss Money with Your Spouse
A clear budget will help you discuss money and goals with your spouse or family. A written budget makes sure that everyone involved in the discussion is “on the same page,” so to speak.
Money is the most common topic that couples fight about. Learn more about discussing money with your partner.
#5: Your Perception is Not Reality
Many people are surprised when they discover where their money goes. People often think they spend a lot on X, Y and Z, when in reality a huge chunk of their paychecks – more than they realized – get spent on A, B and C.
When the cold, hard facts are in front of your nose, you’ll avoid mistaken assumptions.
#6: Find Your Leaks
A budget can show you how those little “leaks” in your spending really add up.For example, spending $25 to go out to dinner every Friday night costs you $1,300 a year. Paying someone $20 a week to mow your lawn during the warm months of April through October costs you $520 each year.
Spending $30 per month on basic cable will cost you $360 per year. Paying $8 each Monday through Friday for lunch while you’re at work will cost you $2,000 each year. Even spending an extra $10 per week at the grocery store will cost you $520 a year. (Learn more about how to save on groceries.)
It might sound strange to think of making a budget as a stress reliever, but just remember: if you’re genuinely in strong financial health, then your monthly budget will remind you of how great you’re doing. In other words – your budget gives you a quantifiable reason to celebrate!