Budgeting is the process of laying out your income and expenses to stay within your means—often with bigger financial goals in mind. For example, tracking this month’s groceries might mean finding the funds for an autumn trip to Mexico. Or it could mean being debt-free by the end of this year.
Create a no-shame budget or spending plan using the steps outlined here with strategies from experts to help, too.
Why You Need a Budget
On a practical level, a budget helps you track spending and avoid missed payments—but it can also help you realize your real-world dreams.
Budgets Create Opportunity
Most budgeting advice emphasizes cutting back, but consumers could benefit from viewing their budget as an opportunity rather than loss, according to Jim Pendergast, senior vice president at specialty business lender altLINE.
“No more Starbucks, eat out less, buy secondhand,” Pendergast said in an email to The Balance. “While this is intuitive—you do have to live within your means—it warps real financial freedom, which is to create sustained wealth. Change your budgeting mindset from scarcity to opportunity.”
The scarcity mindset has been studied by academics such as the University of Chicago’s Sendhil Mullainathan. Mullainathan found that the emotional fear of limited resources—often in combination with truly limited resources or unreliable income—can further deplete brain power and lead to missed payments or poor decision-making, such as taking out predatory payday loans.
But small changes can decrease the stress, unpleasant surprises, and intellectual demands associated with the scarcity mindset, according to Mullainathan and his team of researchers. These include balancing income and spending, creating more predictability, and setting up default payments (such as for your rent and credit cards), which helps you avoid late fees and other unexpected shocks.
To save time, reduce stress, and avoid late payments, consider automating elements of your spending for things like rent or loan payments. So long as you know that money is coming out of your accounts and budget for it, this is a smart method to improve the process.
Budgets Build Savings—and Reduce Debt and Surprises
Planning how you save and spend helps reduce overall debt, which eventually leaves more money for fun and ensures you’re not stuck in a trap where you’re constantly accumulating more debt. You can strategize, and set up a debt reduction plan that works for your budget.
Another benefit to budgeting is that you can be financially prepared for the unexpected. Specifically, experts recommend one of the first things you save for when getting your finances in order is an emergency fund. By placing a specific amount that works for you into this fund, you can be prepared for things like unexpected medical bills or even losing your job. After your rainy day fund is established, you can next work toward saving money for retirement, vacations, or simply higher-cost items such as a new phone.
Once you start carefully watching your spending as part of your new budget, you might quickly note merchant errors or attempts to fraudulently use your credit card. When these activities are caught early, it can save you stress and headaches down the line.
Budgets Simplify Tax Time
Budgeting now can help you in April when tax season rolls around, too, said Logan Murray, a financial planner and tax preparer at Pocket Project, LLC.
“The big headache is going through the entire year of transactions or items sent in the mail to find everything that needs reporting,” Murray said in an email to The Balance.
But with a budget in place (and maintained), you will have already collected much of that information. Keeping track of income can also be essential for tax reasons, as can spending in categories like charitable contributions, education, child care, and health care.
While you can choose to prepare and file your taxes by hand, tax preparation services or software can be extremely helpful for efficiently organizing what you need come tax season.
Budgets Make Goals Achievable
Going into every month with a budget or spending plan can help set spending intentions and boundaries—and give your money “purpose,” said Carrie Friedberg, a certified financial behavior specialist and founder of SF Money Coach. She recommends customizing your spending plan every month.
“Everyone can develop a basic budget with fixed or common expenses, but it’s important to scan your calendar, check your periodic expenses calendar, and talk to family members about what’s happening or expected each month so you can plan accordingly,” she said in an email to The Balance.
Those plans may be more easily realized with a budget, too. According to research from the U.S. Office of Retirement and Disability Policy, general self-control is difficult for everyone. One theory on human behavior points out that “narrow bracketing,” or setting shorter-term limits, can help people achieve goals centered on self-control. Setting a daily spending budget is easier to manage than a weekly budget, although both help you achieve your final goal.
For example, saving for retirement might feel challenging if you see it as a big number. However, creating a short-term goal of putting away $10 per week or $40 per month into retirement can help you reach your long-term goal.
To ease your way into budgeting, consider using The Balance’s budgeting calculator. Just enter some personal financial information, such as your monthly income and expenses, and the calculator will provide the guidance you need.
The Bottom Line
Congratulations! You just took your first budgeting step. By understanding the “why” behind budgeting, you’ll be able to choose a budgeting strategy that works for you and forge your path toward financial success, whatever that means for you.
Everyone’s budget and financial priorities will differ and depend on individual circumstances. When creating yours, think about the goals you want to reach and things you want to do in your lifetime. If you know why you’re budgeting, you’ll be more likely to want to go after it.