Budgeting

A budget helps you figure out your long-term goals and work towards them. If you just drift aimlessly through life, tossing your money at every pretty, shiny object that happens to catch your eye, how will you ever save up enough money to buy a car, take that trip to Aruba, or put a down payment on a house?

A budget forces you to map out your goals, save your money, keep track of your progress, and make your dreams a reality. OK, so it may hurt when you realize that the brand new Xbox game or the gorgeous cashmere sweater in the store window doesn't fit into your budget. But when you remind yourself that you're saving up for a new house, it will be much easier to turn around and walk out of the store empty-handed.

Far too many consumers spend money they don't have—and we owe it all to credit cards. As a matter of fact, the average credit card debt per household reached $7,027 in 2020.

Before the age of plastic, people tended to know if they were living within their means. At the end of the month, if they had enough money left to pay the bills and sock some away in savings, they were on track. These days, people who overuse and abuse credit cards don't always realize they're overspending until they're drowning in debt.

However, if you create and stick to a budget, you'll never find yourself in this precarious position. You'll know exactly how much money you earn, how much you can afford to spend each month and how much you need to save. Sure, crunching numbers and keeping track of a budget isn't nearly as much fun as going on a shameless shopping spree. But look at it this way: when your spend-happy friends are making an appointment with a debt counselor this time next year, you'll be jetting off for that European adventure you've been saving for—or better yet, moving into your new home.

Let's say you spend your money responsibly, follow your budget to a T, and never carry credit card debt. Good for you! But aren't you forgetting something? As important as it is to spend your money wisely today, saving is also critical for your future.

A budget can help you do just that. It's important to build investment contributions into your budget. If you set aside a portion of your earnings each month to contribute to your IRA, 401(k) or other retirement funds, you'll eventually build a nice nest egg. Although you may have to sacrifice a little now, it will be worth it down the road. After all, would you rather spend your retirement golfing and taking trips to the beach or working as a greeter at the local grocery store to make ends meet? Exactly.

Life is filled with unexpected surprises, some better than others. When you get laid off, become sick or injured, go through a divorce, or have a death in the family, it can lead to some serious financial turmoil. Of course, it seems like these emergencies always arise at the worst possible time—when you're already strapped for cash. This is exactly why everyone needs an emergency fund.

Your budget should include an emergency fund that consists of at least three to six months worth of living expenses. This extra money will ensure that you don't spiral into the depths of debt after a life crisis. Of course, it will take time to save up three to six months' worth of living expenses.

Don't try to dump the majority of your paycheck into your emergency fund right away. Build it into your budget, set realistic goals and start small. Even if you put just $10 to $30 aside each week, your emergency fund will slowly build up.

Building a budget forces you to take a close look at your spending habits. You may notice that you're spending money on things you don't need. Do you honestly watch all 500 channels on your costly extended cable plan? Do you really need 30 pairs of black shoes? Budgeting allows you to rethink your spending habits and re-focus your financial goals.

Following a budget will also help you catch more shut-eye. How many nights have you tossed and turned worrying about how you were going to pay the bills? People who lose sleep over financial issues are allowing their money to control them. Take back the control. When you budget your money wisely, you'll never lose sleep over financial issues again.