Published in: Banks | April 8, 2019
4 Things That Might Happen If You Don't Follow a Budget
By: Maurie Backman
Many Americans don’t maintain a budget even though it’s one of the most useful financial tools out there. Here are some unwanted consequences that might ensue if you refuse to budget.
Image source: Getty Images.
When you think about the ways you might want to spend an evening, you might imagine yourself curled up with a good book, camped out in front of the TV, or at a restaurant having dinner with friends. Chances are, a few hours of quality time with a spreadsheet and calculator aren’t going to top your list. But if you don’t make a little time to create a budget, and then pledge to stick to it afterward, your finances are likely to take a turn for the worse. Here are a few nasty consequences that might ensue if you neglect to budget.
1. You'll lose track of your spending
The purpose of having a budget is to see where your money is going, and where there’s room to spend less. Therefore, if you don’t follow a budget, you risk walking around virtually clueless about what your expenses actually cost you, and that might lead you to make some pretty poor decisions.
Imagine you think you’re spending $600 a month on groceries, and so you decide to sign up for a meal-planning service that costs you just $500 a month instead. That’s $100 in savings right there! Ah, but not so fast -- if it turns out you only spend $400 a month on groceries, suddenly, you’re overpaying in a spending category you could’ve otherwise kept down.
2. You'll fall short on your savings goals
Whether you’re saving for emergencies, retirement, a home, or another milestone, if you don’t know where your money is going, you’ll have a harder time curbing your spending and freeing up cash to put in the bank -- or, in the case of retirement, a 401(k) or IRA. And that could hurt you in the long run.
Say you want to retire at a young age with a sizeable nest egg, and you figure out that to do so, you’ll need to consistently set aside $300 a month during your working years. If you lose track of your spending, you might miss that mark time after time, thereby lowering your chances of getting to retire when you want and how you want.
3. You'll increase your risk of landing in debt
It’s easy to overspend when you have no idea how much your bills cost you regularly and how much you can afford to be paying for living expenses given your take-home earnings. As such, not following a budget increases your chances of racking up costly credit card debt -- debt that can trap you in a seemingly never-ending interest cycle before you know it.
4. You’ll damage your credit
Overspending to the point of credit card debt can send your credit score plummeting. That’s because one major factor in determining that score is credit utilization, or the extent to which you use your available credit. If you carry too high a balance, your credit score might take a tumble, and once that happens, you might find it difficult to buy a home, rent an apartment, or even get a job. Without a budget, however, you risk overspending and damaging your credit in the process.
Creating your budget
Clearly, not following a budget is bad news, so if you don’t have one in place, schedule a few hours to set one up. To do so, comb through your bank account and credit card statements from the past year, and see what expenses you’ve been facing on a monthly basis and what they cost. Next, factor in once-a-year expenses, like annual insurance premiums or license renewals, and make sure you’re allocating 1/12 of their cost to each month’s spending. Finally, create a line item for savings, because, ideally, you should be setting aside a good 15% of each paycheck or more for retirement (or emergencies, if you don’t yet have a fully loaded emergency fund).
Once you have all of that data laid out for you, compare your total spending to your total take-home pay and see where you stand. If you earn enough to cover your bills as they stand and still have enough money to put money in a savings account, then you’re good to stick with that budget until something changes. On the other hand, if you find that you’re spending more than what you’re making, or that you max out your paychecks on spending and don’t have any wiggle room for savings whatsoever, then you’ll need to start cutting corners, whether it’s downsizing your home, canceling cable, or cooking at home rather than dining out.
Budgeting can be an eye-opening experience, for better and for worse. It’s also something that’s extremely easy to do, so carve out a couple of hours to create your budget, and then check in on it once a month to make sure you’re following it. You’ll be thankful for it when you avoid the above consequences -- consequences nobody wants to deal with.
Savings account rates are skyrocketing -- Earn 23x your bank
Many people are missing out on guaranteed returns as their money languishes in a big bank savings account earning next to no interest. Our picks of the best online savings accounts can earn you more than 25x the national average savings account rate. Click here to uncover the best-in-class picks that landed a spot on our shortlist of the best savings accounts for 2019.