Budgeting is important because it helps you organize your finances and use your money more wisely. Plus, budgeting can help you improve your credit, prepare for emergency situations and retirement, avoid fraud, and improve your overall wellbeing.
Top 10 Reasons Why Budgeting Is Important
Below, you can see a more in-depth breakdown of each of these key reasons why having a budget is crucial. You can also check out WalletHub’s free budgeting tools to start reaping the benefits yourself!
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Top 10 Reasons Why Budgeting Is Important
Budgeting has a ton of different benefits for your daily life, from helping you stay organized to improving your credit. Below, we’ll examine the various ways it can help you and your wallet in detail.
1. It helps you avoid overspending.
Overspending is dangerous because it can lead to you not having enough money for essential expenses, not saving for your future, and potentially having to take on costly debt. While making a budget can’t change the amount of money you have to begin with, it does allow you to plan out exactly how you use your income.
As a result, if you have a budget, you’re less likely to make impulse purchases, as you’ll know what you have and haven’t set aside money for each month. If you’ve been consistently overspending in the past, budgeting can help you identify any non-essential expenses to which you’ve been allocating too much money. Then, you can direct some of that money toward essential expenses, paying off debt, or savings.
Budget tip: It’s worth having a bit of money in your budget that’s set aside specifically for unplanned expenses, which you can allocate toward anything that crops up during the month, whether it’s something necessary or an extra luxury.
2. It can help you improve your credit.
Many of the states where people have the best budgeting skills are also among the states where people have the highest credit scores. Having a budget can help you improve your credit score in multiple ways. For example, it can help you with:
On-time payments: If you’re more organized about when you have to make payments to your creditors and how much you need to pay, you’re less likely to miss a payment and harm your credit score. This also applies to other types of bills that may occasionally report to the credit bureaus, such as rent and utility payments.
Paying down debt: Budgeting can help you get out of debt. During the budgeting process, you can set aside money for paying off debt every month, and you’ll be able to plan out which debts to pay the minimum on and which to allocate additional funds to. You can also free up funds from less important things and put them toward paying off debt.
If you prioritize paying off debts with the highest interest rates first, you’ll save money and get debt-free faster. Plus, as your overall debt load decreases and you make on-time payments, your credit score should rise.
Avoiding additional debt: Budgeting properly prevents you from overspending and can help you save money in an emergency fund and regular savings. Reining in your spending and having savings to fall back on both lower the likelihood of taking on additional debt. This prevents potential credit score damage from a higher debt load and helps you avoid costly interest.
Better decision-making: The more you learn about budgeting and personal finance, the more likely you are to make good financial decisions that can lead to credit-score improvement.
Careful review: If you get into the habit of reviewing your financial statements, it’s easy to catch anything that’s incorrect and fix it. You can then apply those skills to reviewing your credit reports. Fixing credit report errors can raise your credit score.
3. It enables you to meet your financial goals.
One of the biggest elements of creating a budget is setting goals for the future. For example, you might want to save for a vacation, home renovation or other big expense. Or you might want to focus on paying off debt, building an emergency fund, growing your savings or investing for retirement.
Without a budget, it’s easy to simply have goals but not really commit to setting aside money for them. Too often, people spend money on whatever they want throughout the month, and then end up with no money to put toward future wants and needs as a result.
Ideally, your budget will have at least one main goal and some sub-goals. For example, you might place the biggest focus on paying down your debt, but also set aside a bit of money each month for savings and investments. Sticking to these goals can drastically improve your financial future.
4. It minimizes debt.
The more organized you are about how you spend your money, and the more you build up your emergency fund and general savings, the less likely you are to need to take out additional debt in the future, at least to cover unexpected expenses.
Some types of debt may be unavoidable, like a car loan or a mortgage, but budgeting can help minimize the impact of those as well. For example, good budgeting skills may help you save up a significant down payment, which can help you get better interest rates and take on less debt. You’ll also have a better sense of how expensive of a car or home you can afford to get in the first place, so you’ll avoid getting in over your head.
5. It safeguards you against emergencies.
Budgeting properly includes building an emergency fund over time, if you don’t have one. We recommend setting aside money each month until you have at least six months’ worth of expenses saved. Even if you’re only able to contribute a couple hundred dollars a month, it will give you a growing buffer against unexpected expenses.
Then, when an emergency situation happens, such as a hospital visit, car repair, or loss of your job, you’ll be able to dip into your emergency fund to cover some or all of your expenses, which will minimize or prevent new debt.
Another good way to use budgeting to protect yourself from emergency situations is to leave some money in your budget that’s not dedicated to any particular expense. That way, you can use it to cover anything unexpected that comes up, or simply put it in savings at the end of the month if you don’t use it.
6. It prepares you for retirement.
Around 46% of Americans are not confident they will have enough money to retire, according to WalletHub’s Retirement Savings Survey. That’s why proper budgeting is crucial, as you need to make sure that you are setting aside at least a little bit of money each month for retirement. If you can max out your retirement account contributions each year, that’s even better, especially if you have any kind of employer match.
Oftentimes, it’s not that people can’t save money for retirement, but that they simply do not think long-term and choose to spend their money on luxuries rather than setting it aside for the future. Budgeting forces you to evaluate where every dollar of your income goes, so you’ll get the opportunity to commit to putting money aside for retirement.
7. It makes it easier to catch fraud.
Budgeting requires carefully tracking your spending to see how it aligns with your budget plan. This means you’ll be reviewing your bank and credit card accounts on a regular basis. As a result, it should be fairly easy for you to catch anything that’s out of place, like a fraudulent purchase. You’ll then be able to report it in a timely manner to your bank or credit card company, which will be able to investigate the charge, remove it, and take measures to secure your account against future fraud.
The same applies to purchases that are not necessarily fraudulent but also aren’t correct. For example, a merchant might accidentally charge you twice or charge you the wrong amount. Tracking your purchases for your budget will also help you catch errors like these.
8. It keeps you organized and disciplined.
Staying organized is probably the most basic benefit that budgeting offers, but it’s also extremely important. Budgeting helps you keep track of exactly how much money you’re bringing in every month and exactly how you’re spending it. As a result, you’ll have more control over the way you use your money, and you’ll always know whether you’re able to afford a given purchase, rather than having to guess.
You’ll also build good organizational habits through budgeting as you track your spending on a daily or weekly basis and compare it to your original budget plan. Plus, staying organized will help you make a plan to meet your financial goals by setting aside money for them every month.
Budgeting and Discipline
Budgeting on a regular basis builds discipline. To be a successful budgeter, you’ll have to practice being consistent in a number of different ways, such as:
- Taking the time to make a budget every month
- Setting goals and sticking to them
- Tracking your spending on a daily or weekly basis
- Avoiding the temptation to spend money on things outside your budget
- Periodically reevaluating your budget to see how you can improve and what new goals you can set
It may take a few months before you really get into the swing of things with your budget, but you’ll build great habits that you may even be able to apply to other areas of your life.
9. It increases your knowledge.
Learning what a budget is and how to make a budget expands your financial knowledge and helps you make good decisions moving forward. It may even inspire you to start gaining more knowledge about other financial topics. There are tons of articles about budgeting and other aspects of personal finance to explore here on WalletHub!
Despite how important of a skill it is, budgeting isn’t often taught in schools. In fact, only 10 states have fully implemented a standalone personal finance course for all high schoolers as of 2024. Around 94% of Americans think that budgeting should be taught in high school, though, according to WalletHub’s latest Budgeting Survey.
10. It’s good for your mental health and relationships.
Impact of Budgeting on Mental Health
Budgeting allows you to feel like you’ve accomplished something every month, or even on a daily or weekly basis as you track your progress. Knowing that you’ve met the goals you’ve set for yourself feels good, which can give you a boost to your mental health.
In addition, since you’ll be less prone to impulse spending and will have more opportunities to build savings, you’re less likely to be negatively impacted mentally by unforeseen expenses in the future. Instead, you can adapt your budget or pull money from savings to deal with it (or at least soften the blow).
Impact of Budgeting on Relationships
Planning out your monthly spending ahead of time and giving yourself a set amount to use for fun things can help you make plans with friends and family and stick to them, while also keeping you from overspending. That will help you build relationships with others while avoiding conflict around not having enough money to do activities or arguments that come with spending too much. When you budget, you’ll also be able to save up money, which you can use for vacations and other fun group bonding activities.
If you practice the “loud budgeting” trend, you’ll be able to set healthy boundaries with other people by being open about your budget and how much you’re willing to spend on certain activities. This can reduce peer pressure around spending money, and it can help your family or friend group get more comfortable with discussing personal finance.
Finally, budgeting as a family can help bring you closer to your family members, as you discuss what everyone needs and wants and collectively build a budget that works for you.
Statistics That Show Why Budgeting Is Important
- Most people agree it’s a vital skill: 94% of Americans think budgeting should be taught in schools, according to WalletHub’s Budgeting Survey.
- Our financial literacy is lacking: Budgeting helps improve your financial knowledge, and 47% of American adults currently give their financial literacy a grace of “C” or lower.
- Younger generations are struggling financially: Everyone is impacted by inflation and other economic difficulties, but Gen Z is the least financially confident generation. Budgeting can increase your financial confidence and help you prepare for emergencies while investing for the future.
- Many people are one emergency away from financial trouble: A WalletHub survey found that 44% of Americans are not confident that they can cover an unexpected expense. Budgeting can help you cut down on unnecessary expenses while building an emergency fund to guard against unexpected expenses.
- We have a mountain of debt: Collectively, Americans owe trillions of dollars in debt. The largest portion of that is mortgage debt, while the rest comes from other loans and lines of credit. The average household has thousands of dollars just in credit card debt, for instance. Budgeting properly is essential for keeping up with monthly payments on installment loans and paying down revolving credit debt as quickly as possible. It can also help minimize the acquisition of new debt.
- You’ll likely see credit score improvement: Since budgeting teaches you to handle your money and your credit more responsibly, your credit score is likely to be better when you budget than when you don’t. The average credit score in the U.S. is 701 based on the VantageScore model, which is in the good credit range, and studies show that a majority of Americans do have a budget.
- You may feel better mentally: Around 62% of people who have a budget feel “in control,” compared to only 19% of people without a budget, according to a survey by the Certified Financial Planner Board of Standards, Inc. The survey also found that people who budget feel significantly more confident and more secure than people who don’t.
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