Making a budget is essential. Yet many people don’t know how to create a budget, how to save money using a budget, or even why having one matters.
As noted in my article Are You Better Than Average?:
- 68% of people live paycheck to paycheck.
- 26% have no emergency savings.
- The median amount saved for retirement is under $60,000.
- The average household carries $7,283 in credit card debt.
One likely reason for these worrying statistics is that over 60% of people do not use a budget.
There are many reasons to budget, yet most people still don’t. I truly believe that if more people created and followed a budget, fewer would live paycheck to paycheck, more would save, and many could reduce or eliminate credit card debt.
Budgets matter for nearly everyone. Whether you’re wealthy, middle-class, or struggling, a budget can improve your financial situation.
I’m often asked why I budget. Some assume tracking cash flow means I have money problems; I’ve even had people offer to lend me money when I mention a “budget.”
For some reason, the word “budget” carries a negative connotation.
There’s a myth that only people who are “bad” with money need one.
That couldn’t be further from the truth. Since most people aren’t saving nearly enough for retirement, a budget should be on everyone’s to-do list.
Instead of viewing a budget as restrictive, think of it as a tool that helps you reach your goals.
Note: In this post, “budget” refers broadly to tracking your spending, managing cash flow, maintaining a monthly plan, following a spending diet, or any method that helps you know where your money goes and how much you save each month. Different approaches work for different people, but if you aren’t managing your money, you need a budget that suits you.
Related articles on making a budget:
- 15 Reasons You’re Broke And Can’t Save Money
- The Importance Of A Cash Budget – This May Be The “Diet” You Need!
- Everything You Need To Know About Emergency Funds
- Pay Yourself First – How This Simple Trick Can Help You Save More
- Family Budget Meetings – Yes, You Need To Have Them
Here is why you need to start making a budget:
1. There are many benefits to creating a budget.
Budgets help people manage money better. It’s that simple.
Almost everyone who starts budgeting wishes they had begun sooner. Budgets keep you aware of income and expenses. With a monthly plan you’ll know how much you can spend in each category, how much remains to allocate, and which spending areas need attention.
Whether you use pencil and paper, an app, or just track cash flow, budgeting provides clarity.
Budgets have helped people reach financial goals, pay off debt, increase savings, and retire more comfortably.
2. A budget can help you pay off debt.
Here are some powerful debt payoff examples:
- How This Family Moved To The “Hood” and Paid Off $120,000 in Debt
- How My Wife and I Paid Off $62,000 in Debt in 7 Months
- How We Paid Off Almost $10,000 in 10 Weeks
- How I Paid Off $40,000 In Student Loans in 7 Months
- How This Couple Paid off $204,971.31 in Debt
What do these stories have in common? A household budget helped each of them achieve their goals.
By budgeting, these families and individuals found extra money to attack debt and learned how to become debt free.
A budget can make it possible to eliminate significant debt.
Here’s how one person described the process:
Developing a budget was the first step [to pay off debt]. My wife and I spent an entire month simply monitoring our spending without changing our habits. Why did we do this? Well, we wanted to see where our money was going.
What we realized is that our money was going everywhere. We were spending outrageous amounts on things we didn’t even realize we were buying. Some expenses were necessary (food, bills), but much was unnecessary—small, frequent purchases, eating out instead of at home, and forgotten subscriptions charging monthly.
Budgeting transformed this family’s finances. Even when they didn’t think they were wasting money, the budget revealed they were.
According to NerdWallet, the average U.S. household with debt carries $15,611 in credit card balances, and average student loan debt is $32,264.
If that doesn’t underscore the need for a budget, it’s hard to know what will.
If you carry debt, create a budget. It can help you pay down balances faster and stop costly interest from accumulating. Eliminating debt can bring tremendous relief.
3. Analyze your income and spending.
Without a budget, you may never review your income and expenses, which can lead to ongoing waste.
Spending more than you earn is easier than ever, partly because credit and financing options are widely available. If you’re spending beyond your means or not saving anything, you need a budget.
A budget reveals problem areas. It shows exactly how much you earn and where every dollar goes. You might discover overspending on entertainment, dining out, or bills that can be reduced. Identifying these areas lets you make changes to stop living paycheck to paycheck and start building savings.
Often you can free up hundreds of dollars a month simply by reviewing and adjusting your spending—money that can be redirected to savings or debt repayment.
4. A budget helps you reach financial goals.
Budgets keep you aligned with your goals. Without one, it’s easy to spend without considering the impact on your progress.
A budget supports many goals, including:
- Retirement. Whether early retirement or financial independence, budgeting helps you manage money to reach retirement sooner.
- A vacation. Budgeting helps you prioritize and save for leisure and travel.
- Debt payoff. A budget can reveal funds to accelerate debt reduction and ease financial stress.
- Buying a home. If you dream of homeownership or another large purchase, budgeting helps you save toward that goal.
- Funding an emergency fund. A properly funded emergency fund protects you from unexpected expenses or job loss.
A budget makes your goals realistic and attainable by turning intentions into planned actions.
5. It’s simple to get started.
Creating a budget isn’t hard. You can start with budgeting software, a spreadsheet, or plain paper and pencil.
My preferred tool is Personal Capital, which helps set monthly spending targets, visualize spending and savings, analyze cash flow, and track net worth.
For step-by-step help, see The Complete Budgeting Guide: How To Create A Budget That Works.
Do you think not making a budget could destroy a person’s finances? Why or why not?