Why You Need a Budget
Get organized, save more, and help avoid debt by creating a budget.
Do you ever feel like your paycheck disappears before the end of the month? Does paying down debt seem impossible? Do you wish you were saving more?
If you answer yes to any of these questions, it might be time to consider a budget.
Creating and sticking to a budget may sound difficult, but it can be quite simple. It’s all about figuring out what’s coming in (your current income) and what’s going out (your spending). Along the way, you’ll deal with managing debt, saving more, and investing in your future.
Think of a budget as a way to put your money in different buckets. The first bucket is for essential living expenses, the second for discretionary spending (the fun stuff), the third for short-term savings and paying off debt, and the final bucket for long-term investing.
A budget helps you determine how much of your money you should aim to put in each bucket. Let’s look more closely at three positive results that can come from a budget:
1. You’ll Be More Organized
An essential part of having a budget involves tracking your monthly expenses. In the process, you’ll be able to organize your financial documents, get a good sense of where your money is going, and make any necessary adjustments to your spending or living costs.
To get started, you’ll want to gather your pay stubs or income documents, bank statements, debit and credit card statements, utility, cable and internet bills, medical bills, student loan repayment statements, and any other paperwork (electronic or otherwise) that reflects money you earn and money you spend. When budgeting, you should use after-tax income or take-home pay, not your gross salary. You only want to include money that’s available to you.
The next step: use those documents to determine the past three months’ expenses. Start with the fixed bills, such as rent or mortgage, car payments and utilities, phone and streaming. Then try to average your expenses that may vary each month, such as groceries, entertainment, and travel. Divide the annual or semiannual items, such as car insurance or yearly auto tune-ups by 12, and add that to your monthly figure.
You’ll want to keep tracking expenses in the months ahead to see how accurate your estimates have been and to account for unexpected expenses. You can use a notebook or spreadsheet or one of the apps available online, such as Fifth Third’s mobile banking app, to help keep track of expenses. Tracking allows you to look for places to cut back spending so you’ll have more money for saving and paying down debt.
2. You’ll Be Able to Better Manage and Avoid Debt
While millennials and Generation X currently carry more debt, Generation Z is not immune. People born between 1997 and 2002 hold an average of $16,043 in consumer debt, according to data from Experian. The bulk of that comes from student loans.
Tracking your expenses and creating a budget will help you determine how much you’ll need to have on hand for timely debt repayments so you avoid costly late fees. You’ll be able to quickly see if you are spending more than you make.
A budget will show you places where you can cut costs so you can live on what you earn. You’ll see if takeout and restaurant meals are eating into your paycheck, whether you really need all of those streaming services, and if you can cut back on clothing and other purchases. A hard look at your expenses may lead to lifestyle decisions that can cut your costs even more, such as taking a roommate to share the rent or ditching the expensive car payment and switching to mass transit.
3. You’ll Save More
Having a budget can help you put your financial priorities in order. When you organize your income into buckets and make sure that savings is one of those buckets, you’ll likely find ways to cut back on spending so you really do put that money aside.
One popular formula suggests putting 20% of your take-home pay into a savings account like Fifth Third Momentum® Savings for short-term goals such as building an emergency fund or a down payment on a house. Another 10% could be earmarked for long-term goals such as retirement savings or education funding using Fifth Third’s Scheduled Savings through online or mobile banking.
Everyone has different needs, and there is no one-size-fits-all solution. You’ll find the percentages that work best for your individual situation and likely adapt your budget as you earn more, or your financial situation changes in other ways. But taking the steps to having a budget can help you feel more stable, confident, and financially independent.
Looking to open a new bank account? Find out which checking account and savings account is best for you.