Coming up with a budget is the most fundamental step towards financial freedom and monetary success. If you don’t know what money is coming in and going out, there’s no way you can get control over it, leading to overspending and overdrafts.

A spending plan keeps you aware of each financial step you take. It allows you to plan ahead and choose where you want your money to go and find where it’s not serving you. Let’s look at why you should use a spending plan specifically and how to implement one in your life.

Budgeting 101

However you keep track of your money flow, a budget is absolutely critical to financial success. A digital spreadsheet program is the easiest method to use, but people have been getting along just fine with a paper ledger for decades, so use what comes naturally to you.

A well-drawn out budget considers where your money is coming from – primary job, part-time work, freelancing, annuities – and tracks it in one column. The second column lists every place your money goes each month – mortgage or rent, car payment, food, even Netflix.

In a perfect world, these would balance out, or leave you with extra in the “income” column each month. A budget is helpful if you have a surplus, an even cash in/out distribution or if you’re negative. Let’s look at why.

How a budget helps you save

Depending on how money comes into your household, you can do your budget weekly, bi-weekly or monthly (which most people do since this is how bill recur). If you have extra money after bills and basic human upkeep, these are discretionary funds. While you can use them in the moment to do something fun, a budget helps you plan on constructive functions for them.

For instance, if you want to go on vacation in the summer, tracking your money will help you figure out how much you need to save and just how to do it. Additionally, using your budget can help you set aside some cash each month into a savings account. If you’ve ever wanted to save up for anything – college, retirement, a home – a budget is your first step.

How not having a budget hurts

When you don’t have a budget in place, what you think is discretionary spending can destroy your finances. One extra night out with your friends or an impromptu dinner date can mean your car payment bounces or your utilities get shut off.

Tracking your spending also helps you realize how much you spend on things like eating out. Seeing that you spent $50 at a restaurant when you know you have $100 of groceries for the week sitting in your fridge can be a hard lesson in paying attention.

Budgeting is a habit that feels like freedom

Even though keeping track of your money adds more work to your monthly life, in the long run, it will set you free to do whatever you never thought you could afford. It’s also the only reliable way to get out of debt once and for all. Grab a cup of coffee, pop open Excel and start working on your spreadsheet to freedom today.

The Importance of a Spending Plan