- Personal budgeting is a major factor in achieving long-term financial stability.
- Impulse spending
- Hampers medium and long-term financial goals
- Lack of emergency fund
A budget is a plan on the way you spend a certain amount of money within a particular time frame. A personal budget is your finance plan. You use it to allocate your income towards living expenses, debt repayment, and savings. As you create a personal budget, include past spending and any debts. When you do not have in place, there is more risk to spend your earnings on unnecessary stuff and expensive items.
Budgeting has many useful aspects and helps to identify weakness. It shows the truth about your personal spending habits, the neglected financial areas and portrays whether there is a need to create a larger emergency fund. The bitter reality is that many people do not bother keeping a personal budget. The effect is that it will hurt your financial life in these ways:
A budget helps us to compare the amount of money we earn and our expenses. Without budgeting, we lack a disciplined approach to restricting spending to our income. After spending without planning, you will one day find that there is no money for important living expenses and optional items. It will make you suffer or incur debts to meet your obligations. The more spend without planning, the more you accrued debt.
A personal budget helps to track our expenses and understand where we stand financially. Without it, you lack a road map to your financial health because you cannot understand your spending habits.Financial crisis
A personal budget makes you regularly think about your money. More attention to the budget means that you can notice any problems before they turn into a disaster. You cannot stay ahead of a crisis if you do not have a budget that forewarns you on unhealthy spending habits. As a result, you cannot think of additional ways to create income, save, and build wealth.
When you find yourself in immediate financial crisis, you become desperate and search for loans anywhere including from loan sharks. It pushes you deeper into financial crisis because you must pay the loans on time at a very high interest. Failing to pay on time is inviting the loan shark to something bad like confiscating your expensive items to sell at a throwaway price.
A budget is essential when planning for medium term financial goals and retirement which is long- term goal. Failing to budget means that by the retirement, you might not have the kind of savings you need. It will compel you to work longer to generate more income for your later days in life. It also means that you cannot make enough savings to build wealth when working as most of you money goes to pay accumulated debts.
An emergency requires you to take immediate action. Examples of emergency are when your home is almost foreclosed, your car dealer wants to repossess it, or you need urgent medical attention. It is hard to set aside an emergency fund without creating a personal budget because you cannot calculate the income generated and expenses within a specified period for you to know the amount left for saving.You can eliminate wasteful expenditure
All your money can go to expenses if you do not have a budget for monitoring them. You are likely to spend on wasteful habits without the knowledge, and it will always hinder you from achieving your financial goals. A breakdown of your expenses in a personal budget will help in laying all your expenses on the table. You will be surprised to find that some of your expenses are unnecessary.
A comprehensive personal budget reduces your stress levels. It eliminates the possibility of encountering unpleasant financial surprises.