In the past year, the global economic landscape has changed dramatically. The measures taken to contain Covid19 have had a severe financial impact on people all around the world.

The economic uncertainty we are facing only emphasized the financial problems of younger generations that were already living paycheck-to-paycheck. The financial stress millennials were experiencing prior to the crisis has only gotten worse due to their lack of preparedness.

And while this duress may be unavoidable, there are some steps you can take to alleviate it. This is why we decided to write about one of the most foolproof solutions for getting in control of your finances – budgeting.

Why is it important to live on a budget? Apart from ensuring your survival in the next few months, you can also save from random expenses and add to your cryptocurrency position. The projected inflation rates are not rewarding those who save, but rather those that put their savings to work.

This is why we wrote this article. In the next few chapters, you will learn why is it important to live on a budget and the best ways to do it.

What is budgeting and why is personal budgeting important?

Budgeting is the process of creating a strategic allocation plan for your monthly income.

While this may seem like a simple concept, it is seldom adopted, as most people overlook their spendings entirely. Recent surveys show that more than 65% of people are now aware as to how they spent their latest salary.

The most important feature of a good budget plan is to give you an honest overview of your living expenses, and indicate where additional spending is not justified. This strategic process helps you track your expenses, control and allocate your spendings, and help you save money over time.

This way you will be able to pay off your debts and create an emergency fund, which in turn decreases your stress.

Finally, living on a budget can help you make better financial choices for the future. It can give you an opportunity to reinvest some of your income and put it to work.

Five key benefits of living on a budget

To understand why is it important to live on a budget, we need to have a more detailed look into the advantages budgeting brings in everyday life.

1. Keep track of your financial goals

A budget can be seen as a roadmap to your financial future. While setting a number of financial goals is great, fulfilling them is an entirely different matter.

Budgeting helps you divide your goals into achievable milestones and allows you to create a defined process of reaching them. Basically, it allows you to track your financial choices and lets you keep your eye on the bigger picture.

2. Save money

As we mentioned earlier, saving money is one of the most obvious advantages of why is it important to live on a budget. While a small number of individuals save money by default, many of us need a clear plan on how to get started.

Budgeting can automate the saving process, and help even the most forgetful ones to start saving up. This, in turn, can lead to better financial choices and investment opportunities (e.g. DCA into Bitcoin).

3. Prepare for financial emergencies

Life is filled with unexpected emergencies, and the COVID19 crisis showed us how abrupt and severe they can be. And of course, such emergencies always happen when you already have trouble making ends meet.

However, by organizing your expenses and setting up an emergency fund, a surprise bill shouldn’t be able to suddenly put you in insurmountable debt.

4. Get out of debt (or avoid it entirely)

An important step of building wealth and getting comfortable financially is starting to get rid of debt.

Budgeting helps you detect unhealthy spending habits and prevents you from spending money you don’t have, on things you don’t need.

Additionally, by sticking to your budget plan, you can focus on repaying existing debts. This way, you can free up a big chunk of your income otherwise reserved for repaying credit and interest.

5. Peace of mind

All of the aforementioned advantages ultimately lead to a higher quality of life.

For instance, budgeting can help you keep a happy marriage, as it pushes the spouses to be on the same page when it comes to financial decisions.

Furthermore, drawing out a precise budgeting plan will allow you to have a (mostly) worry-free and predictable financial journey. By tracking your spending, you will never get into a situation that could overwhelm you financially.

All in all, budgeting allows you to regain control over an essential part of your life – your finances. Let’s see how you can achieve this by yourself.

Practical guide to creating a budget strategy for future financial success

By now, you should already have a good idea of why is it important to live on a budget. The next step is to learn how to apply this in practice. Below, we illustrate how to create a personal budget by dividing it into 3 simple steps:

Step #1 – Tally up your monthly income

First and foremost, you need to sum up all of your monthly income. This is usually the easiest step in the process, as everyone knows how much money they make.

However, you might want to double-check to be the most accurate possible. In addition to your regular salary, make sure you include any side gigs or passive income that you might have overlooked. Property rentals, crypto mining, stock dividends, anything that gives regular payouts should be included.

This is extremely important, as further down, every cent you earn should be attributed to filling a particular role.

Step #2 – Create a detailed overview of your expenses

Outlining your expenses is often the most critical step of the whole process. To make things easier you can break down your expenses into two categories:

  • Fixed – predictable expenses that you will face each month, no matter what happens. These include things such as your mortgage, utility bills, student loans, car payments, etc. 
  • Variable – these are expenses that can change over time, including groceries, clothing purchases, hobbies, entertainment, eating and drinking out, etc. 

You can get started by gathering your bank statements and receipts from the previous three months. This will give you a rough picture of your expenses, guiding you towards your first month of budgeting.

Additionally, try to dig out some less-frequent expenses, like annual memberships that can be factored in down the road. The more concise your list of expenses gets, the more predictable and manageable your budgeting will become.

Step #3 – Compare income and expenses and calculate your budget

Finally, the moment of truth is here. It’s time to compare your revenue with your spendings and see where you stand.

If your income is higher than your expenses, great! Half of your work is already done and all you need to do is optimize your budget following one of our budgeting methods depicted below.

If, on the other hand, your expenses exceed your income, you need to take a closer look at what you can reduce or entirely eliminate.

Of course, variable expenses will be much easier to cut down. However, you can also look into less obvious expenses including overly expensive phone plans or subscriptions that bring you no value.

If you feel like you are still cutting it close, the smart thing to do is to focus on repaying short-term debt such as credit cards. This will allow you to free up a significant portion of your income.

Once you‘ve managed to balance out the inflow with the outflow, it’s time to commit to a budgeting method.

Why Is It Important To Live On A Budget

Top budgeting methods

Now that you know why is it important to track your spending and how to create your personal budget, it’s time to pick a method that will suit you best. Below are two proven budgeting methods that have stood the test of time and shown consistent results.

Method #1 – Balanced money or the 50-20-30 rule

Why Is It Important To Live On A Budget

This method is quite popular as it doesn’t micromanage your spendings into dozens of categories.  The general idea is to separate your income into three main types:

  • 50% goes to needs – meaning the unavoidable, fixed expenses. 
  • 20% goes into savings – which includes emergency funds and/or debt repayments.
  • 30% goes to your wants – which are the non-essential, variable expenses. 

Method #2 – Zero-based Budget

Maybe one of the most challenging methods, a zero-based budget (ZBB) ensures that every dollar in your income is allocated for a particular purpose.

In a ZBB, all expenses must be justified for each new period, starting fresh each month. Each need and want is reassessed and a precise amount of money is reallocated for its completion.

This method allows you to be extremely efficient with your income, as it doesn’t give any room for overspending. As such, it’s often regarded as the perfect budgeting method for repaying debt.

The following video walks you through on how to create your own ZBB:

Best budgeting apps

People often associate budgeting with tedious spreadsheets and pivot tables. Luckily, there’s a good number of intuitive and time-saving budgeting apps on the market. Below are some of our favorites:

Mint (free) (Android/iOS)

Why Is It Important To Live On A Budget

This free budgeting app helps you track your spendings by allowing you to sync your bank accounts to the budgeting software. A great feature of this app is that it allows you to automatically categorize your expenses using AI and machine learning.

YNAB (You Need A Budget) (paid, $12 per month) (Android/iOS)

Why Is It Important To Live On A Budget

This app requires direct involvement from the individual when it comes to categorizing transactions. YNAB uses the ZBB method, making it ideal for those that want a more hands-on experience with their finances.

Money Manager Expense & Budget (free) (Android/iOS)

This app provides a great visual representation of your budget. It offers an intuitive user interface and has a wide array of options that can cater to both detailed and simplified budgeters.

Additional tips for financial success

While throughout this article we helped you realize why is it important to live on a budget, it’s only the beginning of a successful financial journey. Following some of our tips below should help you regain control of your finances even further.

  • Prioritize savings – before you start spending, make sure you have covered the “saving” part of your budget. To make things easier, you can request from your bank to automatically save a portion (e.g 10%) of your monthly income into a separate account.
  • Invest as early and as often as possible – the earlier you begin investing the more you will be able to take advantage of compounding the interest of your investments.
  • Get rid of depreciating assets – FIAT currencies’ value has been diluted over the years due to inflation. To remedy this trend, you can invest in better store-of-value assets such as Gold or Bitcoin, or new and upcoming assets such as NFTs
  • Focus on the long term – investing in low-risk assets for longer periods of time almost always yields positive results.
  • Use the 72-hour rule – anytime you are about to make an impulse purchase, give it another 3 days to think it through.

Conclusion

With today’s economic uncertainty, it’s essential to stay in control of your budget at all times. 

To help you do this, in this article we talked about:

  • Why is it important to live on a budget. 
  • What are the main benefits of living on a budget. 
  • How to create your own budgeting strategy. 
  • A couple of budgeting methods and our preferred mobile apps to help you implement them. 
  • Some additional tips on how to stay ahead of your finances. 

We can conclude that every budget is personal as it has to fit a person’s lifestyle, values, situation, and goals. Hopefully, this post helped you understand the importance of living on a budget and gave you sufficient knowledge to carry out your own.