Why You Need a Budget if You Don't Have One

Many people are averse to budgeting. The term itself implies restricting, scrimping, and doing without. Many people feel as though living “on a budget” won’t let them use their money as they’d like to, leading them to avoid budgeting in general. But what they don’t understand is that budgeting is a tracking and planning tool meant to expand—not restrict—the money you have.

Creating a budget can lead you to future financial stability. It allows you to plan for the ways in which you’ll spend your money, letting you set some aside for the things you really want to do. It takes away the guesswork of spending, preventing you from having to scrape money together or rely on credit to pay the bills—all while accounting for the things you enjoy. 

What is a budget? 

Simply put, a budget is a plan that allows you to track your income and expenses. Many people frequently overspend because they don’t keep track of their expenses, forcing them to cut out discretionary spending or rely on credit to cover the difference. A budget can help you set aside money for your needs while allowing you to put some toward your wants. 

A budget can be made for an individual or a family. Generally, the idea is to calculate how much money comes in, determine how much has to be spent on necessities, and create a plan for covering your expenses without using more than you can afford.  

How do you create a budget? 

Because budgets can vary widely from person to person, many people decide to base theirs on their typical income and spending habits. By looking at your income and comparing it to your expenses, you can see which areas you’ve spent too much on and which ones need a little more funding. Evaluating your expenses also gives you a general idea of where your money is going each month, which can help you identify where you need to cut spending.  

Most budgets require that you choose a period of time (typically one month), the amount of money you’ll have available to budget, and the things you plan to spend money on. After this, you decide how much money to set aside for each area of spending. It’s a good idea to start with necessary, recurring (or “fixed”) expenses, such as rent, bills (i.e. utilities, cell phone, debt repayment, credit cards), and groceries. You already know that you’ll have to pay these each month and have a general idea of how much money each requires. The money left over can then be put toward changing (or “variable”) expenses, like entertainment and dining out. 

Even with these factors in mind, creating your own budget from scratch can be difficult—especially if you’ve never done so before. This is why using existing budget guidelines or turning to budgeting apps can be helpful.  

The 50/30/20 budget is one popular starting point. This guideline involves breaking down your monthly income into increments of 50%, 30%, and 20%, each of which will be used for different expenses. The breakdown is as follows: 

  • 50% on needs:This is used to pay for necessary expenses, such as bills, groceries, childcare, and transportation. These often fall into the “fixed” spending category. 
  • 30% on wants:This is used to pay for anything that isn’t essential, like a night out or shopping for more clothes. These would be considered variable expenses. 
  • 20% on savings and debt repayment:This is used to set aside money in your savings and to pay off debts, such as student loans and personal loans. 

This budget is meant to be a jumping off point. Some of these categories may change depending on your needs—for example, if you have large mortgage payments or live at home rent-free, the “needs” category may be a higher or lower percentage of your income. However, this model is a good example of one approach to breaking down your income into specific, consistent categories. 

What are the misconceptions of having a budget? 

Although it is heavily advised that everyone should have a budget, many are resistant to the idea. One of the main reasons for this hesitancy is that people see budgeting as restrictive. No one wants to be told how to spend their money, and to some, a budget seems to do just that.   

In reality, a budget is meant to help you make better, more informed spending decisions so you don’t find yourself unable to afford the essentials or forced to sacrifice the things you want entirely.  

People also see budgeting as time-consuming. You may have a different income each month; this will require you to revise and change your budget monthly to make it fit. However, taking the time to refine your budget benefits you in the long run. Doing so ensures that you’re covering all your bases, reducing the chances that you’re overextending your means. 

What are the benefits of having a budget? 

When you find the method that works for you, you’ll see that budgeting is actually a really helpful tool. There are many benefits to making a budget, including: 

  1. Meet your goals. When you create a budget, you identify where you want your money to go and what it should be spent on. This allows you to prioritize some expenses without constantly sacrificing in other areas. Furthermore, setting aside some money each month takes the effort out of savings: you’ll know exactly how much you have to contribute out of your paycheck.
  2. Prepare for emergencies. We can’t anticipate emergencies. But when they do happen, you need to be prepared to deal with them. If you have a budget, you’ll be better equipped to deal with emergencies: you’ll know where all of your money is going and can decide where to pull from to responsibly take care of unexpected expenses.
  3. Avoid spending money you don’t already have. When you don’t budget, it’s easier to find yourself relying on credit cards and loans in order to afford things you cannot pay for out of pocket. If you have a budget, you’ll be less likely to need to use credit to cover expenses, reducing your overall debt and increasing the amount of money you get to keep. 

A budget gives you freedom 

There's a misconception that budgets are restrictive. This is only true when your budget isn’t a good fit for you. It may take a few tries, but once you find a budget that fits your goals, you’ll be glad you did so. 

The main point of budgeting is to help you develop a better relationship with your money and to create better, more informed spending habits. Once you have a budget, it can become easier to differentiate between needs and wants—and, ultimately, make it easier to meet your future goals.

The material presented here is for informational purposes only and does not represent specific financial advice to you or your circumstances personally.