The word “budget” can prompt a negative reaction. For many people, it has connotations of restriction and deprivation. In reality, a budget is just a plan for your money, and as the old saying goes, if you fail to plan, you’re planning to fail.
These days there are lots of software options to help you put together a budget. A pen and paper will also work if you prefer the old-fashioned approach. But regardless of how you do it, preparing a budget is laying the foundation of financial success. Here are three of the reasons why.
Plug Money Leaks
A $4 coffee here, a $10 bank fee there… small expenses can really add up over time. While some of them are worthwhile, others are a waste of money. Putting these expenses in writing helps you make informed decisions about whether to keep them or dump them.
Tackle Big-Ticket Purchases
People often fund a large purchase, like buying a house or sending a child to college, by taking out a loan. That approach can seem like the easy way, but it’ll cost you in the long run, when you’re making payments instead of using that money for other things. Plus, you’ll have to pay interest on top of the amount that you borrowed. Why not use a budget to help you save up over time so you can pay cash instead?
Get Rich Slowly
It’s hard to succeed with money if you’re spending more than what you’re making. To cover the shortfall, you’ll have to tap your savings or — more likely — go into debt. By contrast, a budget helps you make sure that your income is higher than your expenses, so you can save and invest the surplus. Thanks to the power of compound interest, you can end up with a lot of money by saving small amounts on a regular basis.