Establishing and following a household budget does take some time, but it can be well-worth the effort. Not only will using a budget help you make wise purchase choices and live within your means, it can also help you save money in several specific ways.
1. Avoid Impulse Buying
When you use a budget to guide your purchase decisions, it keeps you from making snap buying decisions. On his blog, Louis Scatigna, author of Financial Physician describes impulse buying as one of the biggest money-wasting habits, stating that "many impulse purchases go unused." Getting in the habit of budgeting for your purchases will help you make wise decisions and keep track of where your money is really going. If you see something that you want to buy now, but it isn't on your budget - stop.
Once you use your budget as a go-by for purchase decisions, you'll be able to shop purposefully, looking for the best deals and bargains on the items that you are purchasing instead of falling victim to impulse purchasing. Use shopping apps, store and manufacturer's coupons, customer loyalty programs and other frugal shopping strategies to cut costs; this frees up room in your budget to set aside for savings or to direct toward additional purchases.
2. Monitoring Spending Habits
When you use a budget as a planning and analysis tool, you'll get a clear picture of where your money is going each month. When you see where you spend your cash each month, you just might decide to change your habits.
For example, if you discover that you are spending more money purchasing workday lunches than you spend on groceries for the entire family, it might make more sense to plan for leftovers that you can pack to take to work with you. Even if you decide that the lunchtime expense (which averages around $70 per month) is worthwhile, at least the choice you make will be an informed one. Do the same with other discretionary expenses, such as buying coffee (as much as $835 per year), entertainment, non-essential goods and services and more.
Many people who track their spending for just a few months are very surprised by the results. For a realistic experience, don't change your spending habits at first - just keep track of them. The information that you learn can help you build an effective budget that meets your needs.
3. Comparisons to Others
When you create and follow a budget, you'll be able to analyze your spending habits against recommended and average budgeting guidelines. While your spending habits don't have to specifically match those of other people or what experts recommend, doing these kinds of comparisons can be a useful tool for financial decision making purposes.
Use comparison information to help you make wise decisions. For example, according to Leave Debt Behind, in the U.S. the average percentage of total spending that goes to housing expenses is 24 percent, which includes rent, mortgage payments and property taxes. If you are thinking about moving and wondering how much you can afford to spend on your new place, this information can be useful to you.
While this doesn't mean that you should spend exactly 24 percent of your disposable income on housing, it could be a sign to relook at a housing decision that would take you significantly beyond this percentage. The same article indicates that average spending on recreation and entertainment is five percent. If you are running out of money each month and a review of your budget reveals that you're spending ten percent or more in this category, this may be an area where you need to cut.
4. Building an Emergency Fund
It's hard to make yourself set aside money for a rainy day if you don't have a structured plan, but it's something that everyone should do. Generally, it's best to have an emergency fund with enough money to cover living expenses for three to six months, so that you won't immediately find yourself in dire straits if you lose your job, become unable to work due to an illness or disability, or find yourself in another situation where your income is reduced or cut off.
Set Aside Funds
Leave room in your budget to accumulate an emergency fund. Enter this type of savings as a line item on your budget, and divert money to the appropriate account early in the month. Budgeting can allow you to determine the amount that you need and establish a specific plan for setting aside funds until you have a sufficient nest egg.
Once you've reached your savings goal for your emergency plan, it's ideal to divert the portion of your budget allocated to that end to a different savings account - one that you establish with long-term savings in mind. You're already accustomed to having the money pulled out of your living expense budget, so it only makes sense to continue saving.
5. Long-Term Savings Goals
Setting aside money for goals that are far in the future can also be difficult, especially when you have needs and wants that impact you right now. However, what seems far off in the future now - like buying a house, sending your kids to college, paying for their weddings or your own retirement - becomes just a little bit closer every day. Budgeting can allow you to prioritize your spending habits and make financial compromises focusing on directing your money appropriately in light of what you need and your savings goals.
When establishing a long-term savings plan with a spouse or partner, April Masini of the Ask April advice column offers the following advice: "Open the conversation about the household budget by making a list of what you both want for the future. If you don't say it out loud and then write it down, you can't blame each for not reading minds. You may be surprised by what you hear from your partner. Then make a list of your income, your outflow and what's fixed and variable. For instance, a mortgage is a fixed cost and your clothing budget is variable. You'll be surprised to learn that when the other person feels you're a teammate during this process, and not an opponent, they'll want to cut back where you've been wanting them to cut back - only voluntarily, not under duress (for both of you!)."
Make a Deal
Masini explains how this type of prioritizing can lead to deal making, a useful relationship and budgeting tool for couples. Masini explains, "Deal making is one of the biggest relationship tools out there, and it's free. A household budget can include a savings instrument for the vacations he wants and a savings factor for the new kitchen she wants."
"You can decide to save for one first, and the other second, or you can decide where to cut back in order to facilitate the dreams you both have. One of you may value a hefty life insurance policy more than a vacation. The other may want a vacation home more than helping out the kids with college. In other words, you can use the budget to walk the walk that talking the talk about dreams requires to make real."
6. Cutting or Eliminating Interest Charges
One of your main goals of budgeting should be to look for areas where money is being wasted and eliminate them. If you have credit card debt, budget a significant portion of your income to pay it off. If you don't have this type of debt, keep it that way by sticking to your budget when making purchase decisions. By doing these things, you stay out of debt or reduce the debt that you have - thereby keeping you from literally throwing away money on interest charges. This will ensure you are able to keep more of your money for yourself rather than wasting your hard earned dollars on interest charges from credit card debt.
Average credit card interest rates run between just over 13% to nearly 23%, meaning that even small purchases on a revolving credit account that you can't immediately pay off lead to significant fees. The sooner you pay off debt, the more money you will save - and it only stands to reason that avoiding incurring debt will be in your best interest. While you might be able to get a personal loan with a lower interest rate, any amount you spend on interest is money that could be put to better use.
7. Make Lifestyle Decisions
It's easy to get in the mindset of thinking that you have to have your current level of income - or more - to live comfortably, but that is not always the case. If you would like to quit working, reduce your hours or start telecommuting so that you can spend more time at home, you just might find that your goal is within your reach with careful budgeting and a realistic understanding of your overall budget - not just your income. In order to discover if this type of lifestyle change is possible, the first thing you'll need to do is see where your money goes, then consider if there are areas where you can reduce spending to make your goal possible.
Make Room for Changes
According to BabyCenter.com, the key to determining if it's possible to go from two incomes to one lies with really considering how much work costs you. If you stay home with your kids, you will give up a paycheck - but you will also no longer have work commuting expenses, work clothing purchases and dry cleaning, business lunches, business entertaining and other expenses. You also will eliminate or greatly reduce child care expenses.
Commit to Budgeting
Budgeting is something that everyone needs to do. If you're single, you only have to convince yourself - which is challenging enough. If you're in a long-term relationship or have a family, you'll also need to get buy-in from the other members of your household.
A Team Effort
Andrew McNair, founder and CEO of SWAN Capital and author of Don't Be Penny Wise & Dollar Foolish: 7 Major Financial Myths Debunked advises: "Don't become a self-appointed budgeting dictator. Help your family realize it is in their best interest." Discussing a few of the ways budgeting can make it possible to save money is a great way to convince yourself, and get commitment from your loved ones.