Nearly one in three Americans have less than $500 set aside to cover unexpected emergencies, according to a survey by HomeServe. This isn’t necessarily because we are neglectful; for many of us building up our savings can be a challenge. Our paycheck comes in, we pay our bills, we buy gas and groceries, we may go out to eat, and then we wait for our next paycheck. To escape the paycheck-to-paycheck cycle and build wealth, consider creating and following a budget.
It’s hard to understate the importance of budgeting. Here are a few of the ways budgeting can benefit you, as well as some of the challenges that budgeting helps you avoid.
The Benefits of Budgeting
Whether you use an app, a spreadsheet, or pencil and paper, budgeting can help you plan and track your spending. Some of the benefits of budgeting include:
- Knowing your income and your expenses. By taking a close look at your income and your expenses, you’ll have a better understanding of where your money actually goes. One approach to starting a budget is reviewing your spending by using your checking account statements or your bank app. Categorize your spending using broad categories such as groceries, gas, mortgage or rent, dining out, etc. You may be surprised at how much you spend in some categories.
- Making informed decisions. Once you know how much you have coming in each month and your expenses, you can make informed decisions about where to spend less, where to spend more, and whether you should consider bringing in additional income. For example, if you don’t already have an emergency fund, you may want to start building one. Once you have some emergency savings, you may want to start paying extra on your debts until those are paid off. From there you can start building up your savings even more, including your retirement savings or savings for other plans to build wealth such as buying another property or starting a business.
- Clarity around your goals. Budgeting might sound like a chore, but it’s actually an opportunity to define your goals and what it will take, financially speaking, to make those goals a reality. For example, if there is a dream vacation that you’ve been wanting to take, consider how much money it will take to fund that vacation and when you’d like to have that money. Plan that amount into your budget.
- Flexibility. A budget is a tool. It’s not set in stone. Some of your expenses are fixed, of course, but if things change, you can make adjustments. For example, if you plan to put $100 toward your vacation, but you get a flat tire and to buy a new one, take the money from your vacation budget and try to make up for it later in the month or the next month.
The important thing is that you can make informed decisions based on your spending patterns and your goals. Emergencies are easier to handle, and you can find ways to make small changes, like packing a lunch for work a few days per week, that make a big impact on your overall budget.
Unexpected Ways Budgeting Can Help You Save Money
As you understand the importance of budgeting, you’ll naturally start to make changes to meet your budgeting goals. Budgeting can help you save money in some unexpected ways, though. For example:
- Late fees: A $35 late fee might not seem like much, but it adds up and eats into your budget. With the budget, you can get a handle on how much income you have and when you get that income. Based on those dates, you’ll know when you need to pay your bills so that the payments arrive on time and you don’t get charged late fees.
- Overdraft fees: If you spend more than you have in your checking or savings account, you may be subject overdraft fees. The fees may include a one-time overdraft fee as well as daily or periodic fees for each day that you’re overdrawn. Overdraft fees are typically around $35 per item. So, if you overdraft on three charges, you could be facing as much as $100 in fees. With a budget, you can plan and monitor your spending to ensure that you don’t overdraw your checking account. Many banks, including Arthur State Bank, allow you to link accounts so that money is transferred from another account into your checking account if you accidentally overdraw.
- Poor credit scores and credit history: With the budget, you can make smarter financial decisions. For example, you can pay down your credit card balances, which can help improve your credit scores. You can avoid late payments or missed payments, which also hurt your credit score and your credit history.
Ultimately, perhaps the most significant benefit of budgeting is the peace of mind that it can bring. You can start to build wealth and focus on your long-term goals without the stress of wondering where funds will come from if there is an emergency.
Your Partner in Wealth
At Arthur State Bank, we believe in personal relationships. We’ve been serving South Carolina since 1933, and we weathered every economic storm along the way. Contact us today to find out more about budgeting and how you can build wealth for yourself and your family.