You might think that creating a budget is something that’s only necessary for those who are struggling to repay their debts or are only just getting by. While budgets are essential in both those scenarios, they’re also an important financial tool that can benefit everyone, regardless of the financial position you find yourself in.
The importance of budgeting is one of many financial lessons that’s rarely taught in schools. That contributes to a lack of financial literacy that can handicap individuals for the rest of their adult lives. Still not convinced? Here are five reasons why everyone should create and stick to a budget.
1. It stops you spending money you don’t have
Far too many consumers don’t think twice about spending money they don’t have. Rather than critically thinking about whether they really need to make a purchase, they’ll whip out their credit card and make the payment. That’s one of the reasons why levels of personal debt in South Africa are currently at record highs.
People who create and stick to a budget will never spend money they don’t have unless they make a conscious decision to do so. If they do, at least that’s an active decision they’ve made that should be carefully thought out and researched.
2. It helps to reveal bad spending habits
Creating a budget forces you to have a closer look at your spending habits and in many cases, you’ll be shocked by how much you’re spending on things you really don’t need. This free excel budget template from Wonga is a good starting point. It’s comprehensive enough to really shed light on your spending behaviours and show you where your actual spending is far greater than you might have thought.
3. It reminds you what your financial goals are
It’s very easy to drift through life going from one purchase to the next without ever thinking about your long-term goals and how you plan to achieve them. A budget forces you to define your goals, save money, track your progress and turn those dreams into a reality. Yes, sometimes it might hurt when you have to walk out of a store empty-handed, but when you know that money’s going towards the holiday of a lifetime or a deposit on a house, you won’t give it a second thought.
4. It prepares you for emergencies
Life is full of surprises, some good and some bad. When it comes to financial surprises, it’s very rarely good news. Budgeting will help you create an emergency fund that you can use to pay those unexpected car repair bills or replace your worn out washing machine. Your emergency fund should consist of three to six months of living costs. Although it won’t happen overnight, you’ll feel much better when it’s there.
5. It helps you plan for retirement
If you’re not already saving for your retirement, it’s high time you started. Many of us dream of a retirement spent travelling, but there’s no way your state pension alone will fund it. The earlier you start building your retirement nest egg, the more time it will have to grow. Make sure you budget to put a little money away every month. Many financial planners recommend that you save 10 to 15 percent of your income every month for your retirement, but if you can’t spare such a high proportion of your income, just save as much as you can.
What has creating a budget taught you about your spending habits? Please share your thoughts with our readers in the comments below.