As soon as you start earning your own money, everyone usually advises you that it is important to create a budget. But rarely does anyone give you more reasons why you need a spending plan other than it is a way to save money and gain financial freedom.
Unfortunately, due to a lack of know-how or fear of restrictions, many people do not create a monthly budget, and thus, they end up misusing their money and becoming broke before the end of the month.
If you are among those who live paycheck to paycheck and want to know why you need a spending plan and how to create a budget that works, you are in the right place. In this post, we shall discuss the importance of a spending plan. But before we go to the reasons why you need a spending plan, let’s define what it is first.
What Is a Spending Plan?
Also referred to as a budget, a spending plan is a tool for distributing your income among your various expenses. It documents the amount of money that goes into and out of your account. And although you can have one for your daily or weekly expenses, most people prefer creating a monthly spending plan based on their income and expenses.
So, why do you need a spending plan? Read on…
Why You Need a Spending Plan
- To avoid debt
Failure to create a budget for your income could be why you usually become broke before the end of every month. You might have to borrow money or max out your credit cards in order to survive for the rest of the month. This then strains your plans for the next salary as you will have to pay off these debts; hence you could end up being broke again next month, and it becomes a cycle of borrowing money and repaying it.
As such, one of the main reasons why you need a spending plan is to avoid getting into debt. Creating a budget for your income will ensure that you won’t spend money you don’t have, and instead, will try to only work with what you have because you already know what to spend it on.
- To get out of debt
Perhaps the first point doesn’t apply to you because you have already borrowed money. However, another good reason why you need a spending plan is that it can also help you get out of debt, especially if you follow the 50/30/20 rule. The 50/30/20 budgeting rule dictates that you should allocate 50% of your income to your needs, 30% to your wants, and 20% to savings, investments, and paying off debts.
If you have several loans from different lenders, you can make paying them off easier and more manageable through debt consolidation. This is the method of combining multiple outstanding debts into a single loan.
Debt consolidation helps you get out of debt by eliminating chances of late or missed payments, reducing your interest rates or the number of payments, and is also a simpler, quicker process of paying off debts. If you want to get out of debt and stay out of it, you can learn more about this at debtconsolidation.com.
- To save money
Setting money aside is crucial because this is a step toward financial stability and freedom. One of the main reasons why you need a spending plan is that it enables you to save more money. You can follow the 50/30/20 budgeting rule mentioned above and set up an automatic deduction of 20% of your monthly income to your savings account.
The money you have saved will provide a safety net in case of loss of a job or retirement, help you create a better future for yourself and your kids, and will also be useful in case of emergencies, such as accidents, illnesses, job loss, home repairs, and car repairs, among others.
Another good reason why you need a spending plan is that it enables you to achieve your financial goals. Budgeting can help you save up for big purchases you probably wouldn’t afford with only your regular salary, such as buying a house, paying for school, going on vacation, purchasing a car, etc.
- To develop good spending habits
Creating a budget is the first step toward developing better spending habits. When creating a spending plan, you can easily identify the things you overspend on and the unnecessary expenses you incur in a month. Thus, a good reason why you need a spending plan is to help you identify your bad money habits and break them in order to build more wealth.
When you create a spending plan, you will try to be better at handling money by prioritizing your needs over wants, accounting for every penny, cutting off unnecessary expenses, and learning how to live within your means.
READ ALSO: Stop Spending Your Money on These 7 Things
- For better physical and mental health
Studies indicate that there is a link between financial distress and poor health, both physical and mental health. As such, many people often have trouble sleeping and eating because of stress and anxiety about money.
After misusing all your money sometime during the month and going broke, you could feel anxious and stressed about how you will survive till the next paycheck. Therefore, one of the reasons why you need a spending plan is in order to protect your physical and mental health and have peace of mind.
When creating a budget, you can prioritize important things, such as food, utilities, rent, or paying off debts and cut off unnecessary expenses. You will no longer feel stressed or experience financial anxiety during the month because your spending plan will reduce the risk of running out of money before your next salary. This means that you will also sleep better at night, have healthier eating habits, and experience fewer headaches.
- A spending plan helps you manage your finances
A spending plan is a valuable tool for anyone, especially people who don’t earn plenty of money. One of the reasons why you need a spending plan is that it helps you manage your finances, even when you don’t have much. Your spending plan will clearly show how much money you are working with and where you are using it.
If you realize that you usually overspend on something, you can look for ways to reduce the amount of money you spend on it by either looking for substitutes or cutting that particular expense off entirely. With a spending plan, you have more control over your money and where it goes.
Although some people do not like budgeting because they think it is very restrictive, creating a spending plan is one of the best things you can do for yourself now and for your future self. As you can see above, there are many reasons why you need a spending plan.
Remember that you are doing this for yourself, and thus, you should create a realistic budget based on your income, goals, and expenses. Now that you know why you need a spending plan, starting today, don’t let any of your hard-earned money go to waste, and always make sure to create a monthly budget.
Read more articles from Aisles of Life here.