Why live on a budget?

[Melissa Burnell]

Why live on a budget?

By Shelly K. Schwartz

4 reasons to budget

1. Help control debt

2. Earn cheaper rates

3. Improve relationships

4. Save more money

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 leftover 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 certified

financial planner for Compass Wealth Management in Maplewood,

N.J. “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, said Jim Tehan, a spokesman for the Myvesta

Foundation, a self-help consumer education Web site.

“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.”

Controlling debt

Financial mismanagement makes consumers more vulnerable to

overspending, which results in lower savings and higher credit card

debt.

Myvesta’s 2005 annual Credit Card Survey, reports the average

American carries $2,328 in credit card debt, spread out across 2.9

cards. 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 both pay down existing debt and prevent impulse spending

to begin with.

Cheaper rates

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.

Improve your relationship

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 said. “The mere act of discussing your finances

with a spouse or significant other really does help create better

understanding and better relationships.”

Saving for the future

Finally, learning to live within your means can help you get ahead.

By allocating a portion of your monthly budget towards 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 lose a job or suddenly fall ill.

“Budgets create financial security, which gives you the ability to

withstand the financial surprises that life throws your way,” Tehan

said.

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.”

By Shelly K. Schwartz

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