Key Takeaways
- Instead of diminishing your life, a budget can give you freedom to enjoy it.
- Limiting your spending can lead to healthier choices.
- Making a budget can help you think about the future and make long-term plans.
Setting up and maintaining a budget is one of the biggest steps you can take to achieve financial freedom. But will your budget hold you back from living a rich life? It doesn’t have to.
Instead of thinking of a budget as a restriction, think of it as a set of guardrails. If you have a dog, why have a fence for your yard? So your pooch can play without getting hurt. In the same way, a budget enables you to enjoy life without getting into financial trouble. Yes, you can live healthily, travel, and socialize. Just choose activities that fit within your budget.
What is a budget?
A budget is a plan for your “cash flow.” It shows how much money you take in, how much you intend to spend and how much you’ll save or invest. It includes all expenses, including needs (like rent or a mortgage) as well as wants (like vacations).
Why bother? A budget helps you understand where your money goes. That, in turn, empowers you to plan for your short-term and long-term financial goals.
Even so, just as everyone approaches money differently, there’s no one-size-fits-all budgeting strategy. Three common methods:
- Zero-based budget. You assign a “job” to every dollar that comes in—from paying your mortgage to funding a goal—and record every dollar you spend. This method is thorough but can be time consuming.
- 50/30/20 rule. Half your income covers needs, 30% covers wants, and 20% goes to savings and paying down debt. If those numbers don’t suit your circumstances, you can tweak them until they do. For instance, if you live in a high-cost area, you might increase “needs” to 60% and reduce the others accordingly.
- Envelope system. Using actual envelopes (or an app that lets you avoid paper cuts, like Goodbudget), you set aside a specific amount for each budget category. Once you’ve emptied the envelope, you stop spending in that category for the rest of the month.
3 reasons why budgeting is important
You’ve probably heard that everyone should budget. But why? Because a good budget can enhance your life in many ways.
It helps you eat healthier
A food budget may do more than save you money. It can also improve what you eat.
It may seem obvious, but the first thing you’ll notice when you track food spending is that restaurants charge more than grocery stores. Seeing the numbers side by side could spark you to cook more to save money—and then notice yourself feeling better. That’s no coincidence; home-cooked meals tend to be healthier.
What’s more, you may notice your budget leading you toward healthier choices at the supermarket. For instance, stores frequently put seasonal produce on sale. And a strict spending limit will encourage you to skip those impulse buys near the register, like candy and soda.
It can help you get fit
Americans spend huge sums in the pursuit of fitness via gym memberships, equipment, and trainers. Yet spending less can also lead to exercising more.
That’s because setting spending limits in other categories, like transportation and entertainment, might steer you toward more active alternatives. Want to cut back on driving to save gas? Biking or walking around town benefits your wallet and your body. Blew your entertainment budget for the month? Play pickleball with friends on a public court for free.
If you budget some of your income for exercise, try to get the most you can for your money. Look for free and inexpensive alternatives, like YouTube videos or streaming app classes instead of live ones. Check out workplace or school discounts that make joining a gym more affordable. For home equipment, local giveaway groups like Buy Nothing or online buy/sell sites like OfferUp can be a source of inexpensive used weights or treadmills.
It helps you plan for the future
When you live paycheck to paycheck, it’s hard to look beyond the next week or month. But crafting a budget encourages you to look farther ahead.
Maybe you never really took time to think about next year’s vacation or a kitchen remodel. A budget that includes future goals encourages you to think realistically about how to make them happen.
For example, say you’ve always dreamed of an Alaskan cruise. Minus a budget, that trip might’ve felt out of reach. But to create a savings category for it, you first would have to ask yourself how much money you’d need to go?
That question alone encourages you to start researching ways to spend less—or earn more. You may find that cruises—especially since COVID-19—come at a wide variety of price levels. Maybe you hear about ways to save on lodging at the port. Perhaps a certain credit card can help you earn miles toward the flight portion of your trip. Or maybe you take on a side job to speed your savings. Before you know it, you’ve turned a dream into a date on your calendar.
While saving for fun things is—well—fun, the most important thing you’ll save for is retirement. Making a budget is an ideal time to also assess whether you’re saving enough for your later years. Use an online calculator to predict how much retirement income you’ll need, and how much your current rate of savings will provide.
Do you need to put more into your 401(k) or IRA each pay period? Check with your employer to find out if you’re taking full advantage of benefits that could help you save, like matching contributions. Planning now can help you worry less about the future, greatly adding to your quality of life.
What you can do next
Healthy financial habits and life habits can go hand in hand. Start thinking about changes you can make today that could save you money and help you eat healthy, move more and better plan for the future. Then consider talking with a financial professional about how best to grow your savings.
Dori Zinn is a personal finance journalist focusing on income inequality, college affordability, investing and more. Her work has appeared in The New York Times, Forbes, TIME, CNET, and Yahoo, among others.
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