What’s the biggest predictor of becoming wealthy?
Nope. It’s not your income.
Nope. It’s not how you invest.
The main factor for future wealth is how much money you have left over after all of your expenses (aka your savings rate).
Period. The end.
Overspending leads to debt and financial ruin no matter how much you make or how much money you have. (Think of all the bankrupt lottery winners.) Spending less than you make leads to financial independence no matter what your income is.
So if we know that savings rate is the best predictor of future wealth, the majority of our focus in personal finance should be spent on maximizing extra money at the end of the month.
So why is budgeting important?
It’s the one thing we can do to ensure our financial success.
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What is a budget?
A budget is a spending plan that helps you get control over your money. You take a look at your cash flow (your income and expenses) and choose where you spend your money and how much you want to put toward your financial goals. – Family Budget Calculator
But sticking to a budget can be challenging for most people when they don’t fully understand the importance of budgeting and its benefits.
The benefits of budgeting come in two varieties – financial benefits and psychological benefits.
Financial Benefits of Budgeting
Let’s start with the financial benefits. Think of these as the tangible reasons why budgeting is important.
Reach your financial goals
Whether you want to pay off credit card debt, save money for a house or home improvement project, start a small business, become financially independent or pay for your kids’ college, it all stems from budgeting money towards that goal.
For example, if you want to save up for a down payment of $50,000 in 2 years, you would earmark $2,000 per month in your budget for 24 months to achieve your goal.
Become debt free and avoid debt altogether
When do people go into debt? It happens when we buy something we don’t have the money for yet.
This could take place when making a major purchase like a car, or we could wander into credit card debt as the little bits of daily spending add up.
Budgeting helps you become debt free when you carve out monthly payments to pay off debt.
Budgeting also helps you avoid debt altogether.
Families who don’t budget are more likely to overspend and go into debt while those who budget are more likely to spend less than they make.
A budget can help you get out of debt debt and never go into debt in the first place.
Achieve financial independence
Financial independence is being able to live off of the wealth you’ve built over time.
You’d need about 25x your annual expenses to support yourself without any other money coming in using the 4% rule.
If you spend $100,000, your financial independence number is $2,500,000.
Following a budget helps you understand your expenses so you can figure the money needed to reach financial independence.
AND it helps you free up the money on a monthly basis to reach that goal.
Improve your spending habits
We make financial decisions every day even though the money part is often an afterthought.
We grab our morning coffee, click on Instagram ads, choose our normal food at the grocery store, order that extra drink.
Spending habits are ok as long as they serve you. If they are a waste of your money, it’s time to break them.
Budgeting makes you aware of your spending habits. At that point, you can decide whether you want to keep, cut back or eliminate that spending altogether.
Psychological Benefits of Budgeting
The importance of budgeting goes well beyond the financial impact.
My clients often experience a huge emotional lift after going through the process. Here are my top psychological reasons to budget.
Less Stress – Go from dread to empowerment
One of the most predictable things clients say when we start diving into the numbers is, “I’ve been dreading this!”
Yet, by the end of that particular meeting, they feel so relieved and empowered knowing that information.
After people face their fears, stress levels go down. In fact, avoiding things teaches your brain to be more afraid according to Psychology Today.
Budgeting makes life less stressful because you face what you’ve been avoiding, realize it’s not as bad as you think, and now know how to get in control of your spending.
Makes your relationship stronger
Money fights are a leading cause of divorce. More specifically, those fights are usually about spending, debt, and lack of communication.
Budgeting makes you more likely to get out of debt and live below your means which eliminates those relationship stressors.
Budgeting (when done together) also increases communication in your relationship. You may think this will lead to more arguments, but it actually gets couples on the same page and brings them closer together.
My clients who have lived on a budget end up in better financial health AND with a stronger relationship.
(If you need help here, book a free 30 minute session with me so we can figure out how to get you on the right track.)
Spend money guilt-free
Have you ever done something that you know you shouldn’t?
Of course. We all have.
How did you feel after doing it? Lousy, right?
That’s cognitive dissonance, a contradiction between two thoughts in your head or a thought and your actions.
Spending works that way too. We carry guilt when we spend money we know should be going somewhere else. Or when we spend on something that contradicts our values and priorities.
But when you take the time to understand your values and priorities, then make sure your spending is in alignment with that, the dissonance goes away.
Now, you can spend guilt-free because you know your priorities are reflected in your budget.
Why is it important to live on a budget?
Honestly, most people avoid budgeting because they think it’s going to be hard. They think it has to be rigid and restricting.
But, the opposite is true.
Budgeting can be easy and extremely worthwhile.
It can improve quality of life both financially and psychologically. It can remove the conflict in relationships and bring couples closer together.
Don’t believe me? Check out what my clients have to say about it.
Need help with your budget?
Budgeting is the most important piece of personal finance and also the one with the least amount of resources devoted to it.
The financial planning industry doesn’t spend enough time here which is why I left that career to start Family Budget Expert. It’s too important.
Book a free 30 minute call with me to see how I can help you free up extra money, bring your relationship closer, and live your life in alignment with your values and priorities.
Need help but don’t want to talk? Get my free guide to cut your spending in 5 steps without a restrictive budget.
