A lot of people often ask, why bother budgeting? There are plenty of reasons! Budget setting can be a very powerful tool in saving money and achieving financial independence.
This blog post will outline some of the most effective ways to budget, in order to reach your monetary goals.
We will get into the nitty gritty of budgeting eventually, but first, let’s look at the basics.
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What’s the ultimate purpose of budgeting?
Is it to make sure that you’re not spending too much money on shoes versus cat food versus toilet paper? Of course not.
The point of budgeting is to make sure that at the end of the month, you still have money left over.
The Real Point of Budgeting
The purpose of budgeting, in other words, is to make sure that you’re living below your means, rather than living at or above your means.
Some people use a budget as a tool to make sure that they don’t live payday to payday.
How Budgeting Can Help
One of my good friends used to move money into his savings account at the start of each month. He’d pat himself on the back, thinking that he was saving money.
At the end of the month, in order to pay his bills, he’d transfer money from savings back to his checking account. His savings account wasn’t growing – he was just playing the transfer game.
He fooled himself into thinking that he was saving. He didn’t recognise this fact until he made a budget and began tracking his expenses.
Monitoring his net worth, he says, also helped him recognise the effects of his money habits.
Don’t be like my friend. (Or, if you’re already like him, act like his new, reformed self.) If at the end of the month you’re breaking even and you don’t have any margin of error left over, you’re living for the next payday, and that isn’t a position you want to be in.
A budget is one possible tool that could get you out of that bind. Strictly speaking, a detailed line item budget isn’t necessary.
You don’t need to track or care about how much money you’re spending on restaurants versus clothes, particularly if you’re already debt-free and saving a significant portion of every payday.
How Much Should You Be Saving?
At a minimum, everyone should try and save at least 20% of their income. That divides out as 10 to 15% into retirement accounts, and 5 to 10% into other savings goals.
That 20% figure is just a starting point. There’s no harm in saving more, and there’s even a growing movement of people who promote the notion of saving half.
A detailed line item budget is simply a tool that helps you get there. It’s not the solution to your problems; it’s just a mechanism that you can use to help you save more.
Different Kinds of Savings
By the way, when I talk about savings, I’m referring to any activity that ultimately boosts your net worth. I don’t literally just mean money that you stuff into a savings account.
I’m referring broadly to money that you might put into retirement accounts, a health savings account, flat spending accounts, or that you might use as additional payments on a debt.
For example, say your mortgage is $1,500 per month, but you pay $2,000 per month.
That marks the extra $500 as an additional principal payment, so the $500 counts as savings.
Sure, it’s not literal savings in a bank account, but it’s money that directly boosts your net worth. It’s savings nonetheless.
Are you inspired to go and save?
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Read the original source article here.
You can also read more about payday loans in our previous blog post: What Are Payday Loans? Your Guide to Understanding Payday Loans