A budget can help you save for retirement

Quick Summary

  • Budgeting is a critical part of long-term financial success.
  • When creating a budget, it’s important to separate wants from needs.
  • If you follow a budget, you’ll have an easier time saving for retirement.

If you mention budgeting to a group of personal finance bloggers, awkward things will happen. Some believe in budgeting, some hate budgeting. Some have detailed spreadsheets that track the path of every dollar, while others just wing it.

At the end of the day, having a way to track how much you’re earning and spending each month—and where your money is going—is critically important to your financial success. Whether you want to call that a spending plan, a budget, or your magical money plan is up to you. But having a tracking system of some kind is vital.

Coffee, wallet, and a piece of paper that say budget used for the purpose of budgeting.

Fear of the Unknown

Even in its most basic form, a budget is still something many people feel they can’t manage.

One reason for this is the natural fear of not knowing how to do something. People think of giant two-inch-thick corporate budgets. They think of calculators, crunching numbers, and a huge investment of time. It’s all because they have never been shown how to budget—and specifically how to make it a simple process.

If you’re afraid of budgeting because you don’t know how to do it, fear not. You can use a budgeting app or online software to guide you through the process, from a rough calculation to a detailed spreadsheet that follows every penny.

Of course, you can crunch the numbers yourself. Add up all of your income sources and then add up all your expenses for the month. If you have more income than expenses, that’s good—and you can put some of that leftover money into savings.

If your expenses are higher than your income, however, you’ll have to make some changes to get your budget in line. In overly simple terms, that means a combination of:

  • Spending less money.
  • Making more money.

Fear of Accountability

Another reason people avoid budgeting is they fear the accountability that comes with it. If you use a budget, it can be hard to justify your spending choices. Did you really need that pricey outfit (that you’ll wear once)? Are you taking advantage of that expensive gym membership (or could you just throw on your kicks and go for a run)? Do you need cable TV (or can you watch your favorite shows online)?

Coming to realize your spending habits are holding you back financially isn’t fun. And it can scare you to realize that you have overextended your finances by spending more than you earn. It’s hard to give up a lifestyle, even if you really can’t afford it.

A budget is essentially a weekly/monthly dose of reality, and that can be tough to deal with. No one wants to be told that they shouldn’t be doing something they’re currently doing.

Budgeting Is Necessary for Success

Whether you go all out with your budget in a spreadsheet or software program, or you do your calculations on the back of a napkin, having some sort of system in place is essential to your long-term financial success.

Can you be successful by driving without a plan into your financial future? It’s possible. But having a budget helps you see the mile markers and speed bumps of your financial life. You’ll know when you can afford to speed up your spending, and when you need to slow down or come to a stop.

Put Retirement in Your Budget Today

To build up a substantial nest egg that will last throughout retirement, you need to start saving now. A Roth IRA is a great place to start.

One advantage of a Roth is that you pay taxes now when you invest money and your contributions and earnings grow tax-free.

You can withdraw your contributions at any time, for any reason, without paying taxes. And if you wait until you’re 59 1/2 and the account is at least five years old, all of your withdrawals are tax-free. If you need money sooner, you may be able to withdraw money early in certain situations.

We all know we’re supposed to save for retirement (how else are we going to afford to live after we stop working?). Still, getting started can be difficult. Many people ask, “How can I get started today if my budget is barely squeaking by as it is?”

Granted, it’s an uphill battle, but it’s one you must win.

Focus on the Basics

No matter your current lifestyle, it’s important to recognize the difference between wants and needs. Needs, of course, are things you need to survive:

  • Food
  • Water
  • Shelter
  • Clothing
  • Medical care

Everything else is a want—things you’d like to have, but that aren’t essential to your survival. When you’re making a budget, you have to find the money to pay for needs first. Then, if there’s any money left over, you can decide whether to spend, save, or invest it.

Sometimes, the line gets blurred between the two. For example, you have to eat dinner (need), but it doesn’t have to be at the trendiest restaurant in town (want). Likewise, you need a place to call home, but it doesn’t have to be the biggest, nicest house in the best neighborhood.

Once you can differentiate between needs and wants, it can be a lot easier to get your budget under control. And anytime you’re thinking about buying something you want, pause and ask yourself, “Is this something that I need? Do I have something already that might work in its place? Is this more important than meeting my financial goals?”

Be Diligent in Cutting and Saving

Ideally, you’ll cut enough money out of your budget to start fully funding a Roth IRA up to the contribution limit. For 2019, that’s $6,000, or $7,000 if you’re age 50 or older. That comes out to $500 a month (or about $584 if you’re 50+).

If that sounds like a lot to cut from your budget, it is. Even if you could only cut $200 from your budget, that’s a huge step in the right direction. Putting aside any money for retirement is better than putting nothing aside.

However, there’s one thing you must be keenly aware of as you start canceling services and reaping budget benefits. That extra money you cut—if you don’t carefully account for it—can easily be swallowed up elsewhere in the budget.

To keep that from happening, take that money and deposit it in a separate bank account. Better yet, set up automatic deposits into the account—or even into the Roth IRA itself, if your provider allows it. That way you’ll be certain you’re saving for retirement and planning for your financial success.

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