If you do prepare a household budget, a recent Gallup poll showed you’re in the minority. In fact, only one in three adults polled last year admitted to creating a detailed budget to track their expenses. The poll, which was based on a random sample of 1,012 adults ages 18 and older, also found that only 30 percent of adults take the time to create a long-term financial plan with investment and savings goals. And the other two-thirds of folks? Well, they’re just winging it.
Unfortunately, our lack of financial planning is starting to show. According to a recent report from the Federal Reserve Bank of New York, non-housing household debt rose 3.3 percent to $2.94 trillion in the last quarter of 2013, with $11 billion of the surge attributed to credit card balances alone. Ouch. But, with so few Americans creating a budget, it’s easy to see how things have gotten out of hand. This is simply what happens when two-thirds of adults fail to create a budget and opt to “see what happens” instead.
If you have never taken the time to create a household budget, the good news is that it’s never too late to start. There’s a reason why the saying, “it’s better late than never,” has stood the test of time. It’s because it’s true. Whether you’re starting your career or nearing retirement, a budget might be just what you need to get your finances on track.
Still not convinced? Oh, you definitely need a budget. Here’s why:
1. You don’t know what you’re spending. If you’re not using a budget, chances are you have no idea what you’re spending. This could be disastrous in categories where you tend to overdo it, such as groceries or entertainment. If you want to get in touch with the reality of your situation, start by tracking your spending for an entire month, tallying up each expense in categories such as groceries, gas, entertainment, utilities, clothing, etc. You might be surprised by what you find.
2. You don’t know what you’re saving. If you don’t know what you’re spending, you probably have no idea how much you’re saving. Sure, you might be socking away 5 or 10 percent in your 401(k), but will that be enough for retirement? If you don’t create a budget and track your spending, you may never know how much you could be saving.
3. You aren’t realizing your potential. If you’re overspending on XYZ, and don’t have a clear picture of your savings, you aren’t living up to your potential. Think about it. Imagine you start tracking your spending and find a way to cut 20 percent. Not bad, eh? Add that 20 percent to your savings, and watch the money pile up quickly. Of course, if you don’t track your spending or create a budget, that will probably never happen.
4. You’re wasting time. When do you want to retire? If you haven’t thought about it, it’s probably time to start. Now. People always talk about the power of compound interest for good reason. Basically, the earlier you start saving and investing, the more time your money has to grow. If you wait too long and forgo years of interest and earnings, you’ll just need to save more toward the end of your career.
5. You’re not living the life you want. When you fail to create a budget, you fail to create a plan for your life. You fail to allocate money to your priorities, and you leave your financial future up in the air. On the other hand, creating a budget allows you to assign a dollar figure to the things that matter most, whether that’s retirement savings, travel or other goals. Without a budget, you’re not only wasting your potential, but you’re wasting money that could be spent on the things you really treasure.
The bottom line: If you’ve never created a budget, it’s not too late to get on board. Start tracking your spending and income, and create a plan that works for you. Prioritize the things that matter most in your life, and quit wasting money on the things that don’t matter at all. And remember, don’t see your monthly budget as a prison cell. If used correctly, it can actually set you free.
Holly Johnson is the founder of personal finance website, Club Thrifty, which provides tips for frugal living, budgeting, and more. Holly also writes about frugality and travel at Get Rich Slowly, Frugal Travel Guy, and her other website, Travel Blue Book.