Why Failing to Budget Leads to a Debt Burden on Your Personal Finances - Savology

There is a quote by Craig D. Lounsbrough, who once said, “Comfort is a stance of avoidance rather than the pursuit of excellence.” According to the latest figures by Debt.org, consumer debt approached the $14 trillion mark, with the average American household having over $8,000 in credit card debt.   

Depending on which resource you read, the number of Americans living paycheck-to-paycheck ranges from 59% to 78%. 

How is that one of the wealthiest countries on planet Earth can have so much debt? Is it because we have become too comfortable with the idea of living with debt?

Many critics blame workers are not earning enough at work, while others blame taxes. 

A survey by CareerBuilder discovered that even workers earning over $100,000 a year are living for each paycheck.

Live Within Your Means

Before writing and launching DollarOtter.com, I worked for an 80 billion dollar Assets Under Management (AUM) investment firm. 

It was common to see millionaires walking around every day. It was also not unusual to see returning retirees who set off for a new career from their job only to return-seeking employment because they spent their entire retirement portfolio.  

It was then that it dawned on me that it doesn’t matter how much money you make if you aren’t living within your means.  

Having been in the financial industry for over 20 years, I’ve only met a handful of people who actually stick to a monthly budget. While it is a simple practice, it is one that many hate because they feel it restricts their ability to spend, it has negative connotations and restricts their ability.

Why You Need a Budget

In reality, budgets aren’t perfect, and usually the first few months of implementing one will require adjusting.  

Just know it is okay to adjust your budget as needed, and it is the practice of consistency that is key to being successful with money management.  

When you do not have a plan to make every dollar you earn work for you, you create opportunities for it to work against you — thereby seeing debt build until you become one of the statistics living paycheck-to-paycheck. 

It is a vicious cycle and one that must be broken.

Having a budget gives you control over your money, not the other way around. For instance, it is a financial blueprint that helps you decide if you should pay yourself first or make that debt payment. Failing to create a budget can lead to filing for bankruptcy if finances are not handled correctly. Although finding yourself bankrupt is not a place you would like to be, understanding your options, for example, Chapter 7 bankruptcy or Chapter 13 bankruptcy can help you get on the right track. Using a Chapter 7 Means Test can help you figure out your next steps if you are in a place similar to this. 

A budget allows you to make financial goals such as saving for a new car or a new house. You can create a “car fund” or save for a home down payment by writing down a new cash flow category on your budget.  

By putting that goal in your budget, you are setting milestones to reach it. 

When it comes to paying off debt, you can visually see where your money is going. You might be surprised to discover how much of your money is going towards debt.  

Financial studies estimate that the average family household budget has approximately 30% waste built-in. That’s a lot!

A Budget Addresses Cash flow Problems

Debt is a common practice to acquire or purchase something today and pay for it later, hence interest payments. When one doesn’t live within their means, this creates a cash flow concern.  

Cash flow problems have helped the financial industry make more than $30 billion in overdraft fees.

With the majority of financial institutions charging anywhere from $20-$35 in bank charges, this is additional money that could have been used towards paying off debt or your financial savings.  

Design your budget to work towards a zero-based budget. This forces every dollar to be put into action for you while ensuring there is no option to use the credit card to pay a bill. Implementing this practice will save you money on interest payments to include keeping your credit utilization rate low, which is beneficial for a high credit score, as well as avoiding overdraft charges.

Next, be intentional about your budgeting. This means you should carefully go through every expense line item from previous months to ensure no expense is overlooked.  

You can make the most impact on your finances using this method. With every expense, ask yourself if you need this service or subscription. If you do need the expense, is it one where the monthly amount can be reduced or negotiated for a lower rate? 

Cheaper options can apply to grocery bills as well. Paying for food is one of the most substantial expenses after housing costs. Be creative in ways to reduce this bill by finding deals online or using apps designed to promote discounts.  

Why Failing to Budget Leads to Debt

Everyone likes having money in their bank account. When faced with using your last $100 towards a purchase, don’t default to the easy option of using credit, because you may be dealing with the payment next month with interest. 

When you fail to build a budget, you are basically telling your money, you have no financial goals. Zig Ziglar once said, “If you aim at nothing, you’ll hit nothing every time.”

A budget is a key component of your written financial plan that helps you manage your money. And ultimately, your financial plan is your document and financial roadmap telling your money how to work for you and your financial goals. 

Your financial future starts today

Savology is a free financial planning platform providing fast and free financial planning. In just five minutes you can get access to a free, unbiased, personalized financial plan. Your Savology plan will give you tailored action items to start working on as well as an overview of your financial progress so that you can continue making improvements. As you complete action items and modules, you’ll receive new ones to stay motivated and working towards your financial goals.

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