Why Is Budgeting So Important?

Why is budgeting so important?

While people often associate the word budget with ‘restrictions’, that’s simply not the case. It is a financial tool that allows you to objectively look at your financial position, and gives you an easy way to plan how you can achieve your financial goals.

No one creates a budget for the fun of it (ok, maybe some people do), but it is an important step if you want to achieve financial freedom. It is important for you to know how much money is coming into your bank account every week/month, and how much money is going out. But there are much more benefits to budgeting that you probably aren’t aware of.

Benefits of Budgeting

1. Financial freedom
2. Achieve your goals
3. Retire early
4. Reduce your stress
5. Makes you happier
6. Helps you avoid or get out of debt.

If you’re a budgeting noob, click here where we take you through the process of building a budget step by step.

     1. Financial freedom

Financial freedom is when your assets produce enough income to cover your expenses. In other words, your passive income generates enough money for you to live comfortably without working.

But in order to be financially free, the cash that flows into your account must be greater than the amount that leaves. But how do you know if more cash is coming in than going out? That’s why you need a budget. A budget will give you a clear picture about your financial position.

Once you know what your financial position is, you can plan a strategy to help you be financially free, whether that’s by increasing the amount of money-producing assets you own or by reducing your expenses. But you can only know what to do once you can see the picture clearly. That’s what the budget is for.

     2. Achieving your goals

What’s your goal for this year? What’s your goal in life? Is it to travel more? Or to buy a house? Or something entirely different?

But setting goals is easy. Anyone can do it. But achieving your goals can be difficult.

Which is why budgeting is so important. A budget can help you stay focused and keep you on track. You can easily tell if you’re on track, or moving away from your goal.

     3. Retire early

Building on the last point, a budget can help you retire early if that’s one of your goals. If your goal is to retire early, you need to know how much money you’ll need when you retire so you don’t have to work again. To do that, you’ll need to know how much you need in passive income and savings to cover your expenses.

A budget will simplify that for you.

Furthermore, because you have a financial goal (to retire early), you can budget accordingly so that you can make that dream a reality. A budget will tell you exactly how much you should save in order to meet your goal, and which expenses can be reduced in order to support your goal.

     4. Reduce stress

One of the most common causes of stress is financial issues. That’s because most people don’t have a budget and they don’t know if they can survive until the next pay day. They’re worried if they have enough money to pay off their mortgage or for emergencies.

By having a budget, you can combat the stress by eliminating financial worries. If you live your life on a budget, you’ll never spend beyond your means and you will be well prepared for any unexpected expenses. With a budget, you will sleep peacefully at night knowing that you have got all your finances covered, even in unexpected circumstances.

     5. Makes you happier

Have you ever felt only wanting more? Are you ‘keeping up with the Joneses’?

If you spend all your time focusing on the materialistic objects of other people, you’ll never be happy. You will spend money you don’t have, to buy things you don’t need, to impress people you don’t even like. Without a budget, you’ll find yourself in a negative spiral.

But every time you sit down to record your expenses, you are making a conscious effort to focus on yourself instead of everyone else. And after a while, you’ll completely lose focus of what others are doing with their money. Instead, you’ll be focusing on yourself and what you have.

And trust me, you’ll begin to appreciate what you have and you will no longer care about other people’s things.

     6. Helps you avoid or get out of debt.

If you want to build wealth, then you need to stop accumulating ‘bad debt’. Bad debt is any debt that you accrue buying things that you don’t need or doesn’t make you money. We’re not saying that you shouldn’t buy things that you enjoy, we’re saying that you shouldn’t buy these things with debt.

Bad debt itself is bad. What’s even worse is that you’re paying interest on top of it. So you’re paying more for things that you don’t need.

You shouldn’t confuse ‘bad debt’ with ‘good debt’. Good debt is any debt you accrue in order to increase your passive income. For example, you might get a low interest loan to buy a commercial building that will reward you with passive income. If the commercial building generates passive income that is greater than your loan repayments, then you’ve got an asset without actually paying for it.

If you’re serious about building wealth, you first need to take a moment for self-reflection. Click here to find out if you have the right mindset to build wealth.