If you’re like most Americans, your monthly income never goes far enough. After shelling out for house payments and groceries, it seems there’s little left over for things that matter most to you — weekly dinners out, orchestra-row theater seats, a college savings plan for your kids.
Hate to break it to you, but it’s not your salary that’s to blame. According to financial experts, it’s a pattern of poor spending choices.
“When my clients sit down and really look at where their money is going, oftentimes they are shocked to find it has nothing to do with what’s really important to them,” says Martin Siesta, a CFP professional and original founder of Compass Wealth Management in Maplewood, New Jersey. “Five dollars a day on Starbucks, for example, is a big number when you multiply it by 360. That takes away from things you may have been struggling to attain.”
Life’s little extras are well within reach for those who know how to budget.
By establishing reasonable spending limits and sticking to them, the average consumer can do far more with less — without sacrificing daily conveniences, says Jim Tehan, a spokesman for the Myvesta Foundation, a self-help consumer education website.
“Budgeting is all about controlling your finances instead of letting your finances control you,” Tehan says. “That element of control is going to save you money in the long run.”
Financial mismanagement makes consumers more vulnerable to overspending, which results in lower savings and higher credit card debt.
According to TransUnion, the average credit card debt per borrower was $5,249 in the third quarter of 2014. With interest rates at or above 18 percent for most cards, that gets expensive. For example, a $5,000 balance on a credit card with 18 percent interest would cost you more than $8,000 to pay off if you made only the minimum payments (4 percent).
“The amount of money you wind up spending just servicing debt through credit card interest could be extra money you could apply towards something else,” Siesta says, adding that following a monthly budget can help you pay down existing debt and prevent impulse spending to begin with.
Another upside to life on a budget is that it forces you to become organized. That, in turn, helps you avoid late payment penalties and improves your credit score. Lenders use your credit score to determine how much they should charge you for auto and mortgage loans. It also can affect how much you pay for auto and homeowners insurance.
A less obvious benefit of budgeting is the positive effect it can have on relationships. According to Siesta, sitting down with your significant other to discuss financial goals helps prevent money disputes down the road. It also provides a rare opportunity to define your own spending philosophies. “Money is a huge source of stress for many couples,” he says. “The mere act of discussing your finances with a spouse or significant other really does help create better understanding and better relationships.”
Finally, learning to live within your means can help you get ahead. By allocating a portion of your monthly budget toward savings, you can simultaneously build a retirement nest egg for your future and a financial safety net for short-term emergencies, in case you or your spouse loses a job or suddenly falls ill.
“Budgets create financial security, which gives you the ability to withstand the financial surprises that life throws your way,” Tehan says.
Budgets are all about financial freedom. Without a plan for saving and spending, you’ll never make the most of your income — no matter how much money you earn.
“Budgets are very empowering,” Siesta says.
“They don’t lead you away from something. They lead you toward your financial goals.”