The Importance of Budgeting in Investing

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Budgeting. One word no college student, or adult for that matter, wants to hear.  It means we can’t get our Chipotle and Starbucks today, and that makes everyone sad.  It doesn’t necessarily mean you have to change your lifestyle, just your way of thinking. Realizing the importance of budgeting is the first step in taking control of your spending habits.

If you have poor spending habits, it does not matter how good your investment returns are. Check this out for a unique perspective on the importance of budgeting.

Let me put this in perspective: the government raises a specific tax by 10%…what do you do?  You whine and moan about how bad the government is and that your tax dollars aren’t going to good use. At the end of the day however, you suck it up, and you pay it.  Well let’s think about budgeting as if it were a tax on yourself, in order to pay yourself in the future.  The 10% of your income that you set aside now comes straight off of your paycheck and into a proven index fund (or investment of your choice) to start earning interest and grow with the market.  You are in essence paying your future self, along with interest, with the money you’re saving now.

The best way to keep yourself faithful is to immediately take that percentage of your income that you want to save out of your paycheck.  Most companies give you an option to divert parts of your income to different accounts.  Allocate a certain amount every month to be set aside in your brokerage account to be invested.  You never have the money in your checking, so you don’t get a chance to throw it away on things you don’t need.

Start small.  Don’t eat that Chipotle and Starbucks, but instead take that $15 and invest it. These small choices highlight the importance of budgeting. Start with 5% and work your way up to the 10, 15, and if you really want to get ahead, 20% savings margins.  Easing your way into a simpler lifestyle, and using the motivation that your money will grow exponentially with time and interest will give you the peace of mind to skip that White Chocolate Mocha.  If you saved $15 a week for an entire year, you would have $800 extra in capital that you could invest at the end of that year.  That’s definitely a nice chunk of change for any young investor to start with.

Another fantastic way to budget your money and compound your gains is to take all of the extra money that you get throughout the year like tax refunds, gifts, raises, and bonuses and put them into that savings.  These extra funds should not be counted on year to year in your budget to begin with, and they are the icing on the cake when it comes to investing.  They give you extra capital to invest and profit off of.

Things get tough, and sometimes you cave in and get that extra thing you’ve really wanted. That’s okay!  I’m not saying you have to starve yourself or go without.  Do what you can with what you have, and even the smallest amount of money every month can add up to large gains if invested correctly.  Outside of lottery winners, no one becomes a millionaire over night, but consistency and looking towards the future will give you the motivation to save what you need for the future.

If you're still feeling overwhelmed with creating and sticking to a budget, we can help.  Check out our 1-on-1 Budget Planning Service, a coaching program that takes all the heavy lifting off your shoulders and explains the importance of budgeting.  After you sign up, your Personal Budget Coach will create a plan for you based off your specific needs.

Updated: July 9th, 2016

David Coleman
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David Coleman

David is the founder of investing, finance, and tax education website with the goal of educating the millennial population.

David's main goal is to provide finance and investing education to young college students looking to pay off student loan debt and increase wealth.
David Coleman
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