Do you know where your money went last month? If you don’t track your spending in a budgeting app, you might be surprised.
If the word “budget” sounds limiting to you, think of it as a personalized spending plan instead. Your budget is your plan for how to use each and every one of your dollars. Without a plan, you might be spending money on things that are low on your list of priorities without even realizing it.
A budgeting app is a tool that can give you insight into your spending habits and financial obligations. Some popular choices include:
Here are 4 ways using a budgeting app could help you save money and reach your goals faster.
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Makes spending mindful
Perhaps the most useful feature of a budgeting app is the window it provides into your spending patterns. A budgeting app doesn’t judge you, but it does tell you how much money you spend on Every. Single. Thing.
A dollar on coffee? Fifty dollars on credit card interest? Seventy-five dollars on car insurance? A hundred dollars into your IRA? Your budgeting app will put every expense into a spending category and show you how much you’re devoting to each category.
Whether you consider the expense to be necessary or frivolous is irrelevant to the app. Your app won’t scold you for enjoying another cappuccino. But just seeing where you spend money can help you become more mindful about future purchases.
If you find that you spend more than you want to spend in a particular category, tracking the totals can be very motivating. Most apps even allow you to set your own spending limits, and you’ll get an alert if you reach one.
It’s a great experiment to eliminate categories altogether or for a period of time just to see how much money you can save. This is a favorite activity for smokers who want to quit. If you are thinking of kicking your pack-a-day cigarette habit and you pay about $6 per pack, you’ll save more than $2,100 in a year.
Prioritize your debt
If you have high-interest debt, an app can help you prioritize which to pay off first by showing you account balances and spending patterns. Also, since every transaction will show up for linked accounts, you will be able to see exactly how much you’re spending on interest charges every month. That kind of eye-opener can inspire you to cut spending and pay off debt so that you can put that money toward something that’s important to you.
If you have a credit card with a $3,000 balance, an 18% APR, and a $75 minimum payment, it’ll take you 61 months to pay off (as long as you don’t reduce your payment as the balance goes down). You’ll spend more than $1,500 on interest during that time. But if you can trim your spending and double your payment, you’ll be free in just 24 months, and you’ll save $1,000 in interest charges.
Personal savings goals are easy to set up and track in an app. The apps do this in different ways. You can set a savings goal to remind yourself to set aside a certain amount of money each month. Or you can use an app that allows you to set up and maintain automatic contributions to savings. Some apps help you save behind the scenes — they round each debit card purchase up to the next dollar and automatically put the difference into your savings account or investment account.
Can you squeeze $50 a month out of your budget to contribute to your IRA? If you have a $10,000 balance now and you add $600 a year for 10 years, you could net more than $12,000 in growth.
Several apps help you budget with another person. Even if you live a cashless lifestyle, you might still want to maintain a household budget that more than one person spends against.
Without an app, you can talk about possible upcoming expenses, and you can look back on past expenses. With an app, you can both see in real time, even when you are not together, the status of your spending limits in all of your categories.
It’s hard to say how much you could save by budgeting together, but being on the same financial page typically helps people avoid impulsive spending. Putting a major purchase on the back burner until you have a chance to discuss it can result in fewer big buys.
Budgeting app limitations
While budgeting apps are great tools to help you organize your finances and save money, they do have a couple notable limitations:
A budgeting app is not the money police
A budgeting app can help you get to know your finances intimately so that you can put a plan into place to meet your goals. But your budgeting app can’t do it for you. The app can’t force you to reduce spending or increase savings. Even when you set spending limits, your budgeting app can’t prevent you from exceeding them.
The motivation comes from you. Use the budgeting app as a tool to help you do what you want to do with your money. If you’re worried about not being accountable to yourself, get an accountability buddy. Your significant other, roommate, family member, or good friend are all great candidates. In fact, when you bring up the idea, you might find that the person has been wanting to get a handle on their personal finances as much as you.
A budgeting app needs your input
Although most budgeting apps attempt to categorize your expenses automatically, they will invariably make mistakes. The app will typically choose the category that best matches the store.
Here’s why that doesn’t always work. You might have bought two pounds of apples at the grocery store, or you might have bought a beach towel. Your app would call either purchase “grocery” because of the merchant code. If you want the beach towel in a different category, you’ll need to manually change the category for that purchase.
To get the most out of your budgeting app, review each item to be sure it has landed in the right bucket. This is the best way to get an accurate picture of your finances. It’s good practice to review your expenses line by line at least once every couple of weeks. All apps don’t offer the same features, so if you want the ability to customize, be sure the app you choose allows it.
View more information: https://www.fool.com/the-ascent/personal-finance/articles/using-a-budget-app-could-save-you-thousands-heres-how/