BUDGETING BASICS

It can seem a little scary to take control of your finances, but nothing will work better for your money than a solid budget. Whether you’re working toward a down payment on a home, paying debt, or just trying to live within your means, a budget lays out a distinct path to financial success. In this guide, we will go over the fundamentals of budgeting, discuss the benefits and what to look to budget for, and offer actionable advice that will help shape a budget that works for you.

What is Budget and Why Does it Matter?

Budgeting, in its simplest form, is the process of outlining a plan to track and manage your income and expenses. The advantages of having a budget A budget helps you to not overspend, one half page header Managing volunteers manage Your budget enables you to organize how you spend money and make you build up your savings manage Your budget is important in helping get the most use out of your limited resources enables you to most effectively allocate your resources in a way that is most productive.

Here are some of the reasons that make budgeting important:

• Financial Control: You can easily see where your money is going and make sure you don't overspend by using a budget.
• Debt Pay Down: Paying down debt can lower your credit balance and help improve your credit score.
• Savings Growth: Budgeting allows you to put money aside in savings, creating a cushion for emergencies or big future purchases.
• Financial Goals: Whether it’s a vacation, a new car, or retirement, budgeting allows you to prepare long-term big-ticket items.
• Less Financial Stress: With a plan in place, the constant worry of not knowing if you’ll make it to the next paycheck is greatly reduced.

Now that we have learned why it’s important to budget, let’s look at exactly how to create a budget that works for your lifestyle.

 1- Take Stock of Your Financial Situation

But first, you should have a better understanding of your present financial condition before drawing up a budget. Begin by organizing all your financial details in one location. This includes:

      a- Income: Add up your monthly earnings, including wages, bonus pay, freelance work or any other sources of money. If your income fluctuates, base it on a conservative estimation of your average monthly pay.

     b- Spending: See where you spend and categorize your expenses. This should include:

• Fixed Costs: These are costs that you need to pay on a regular basis, such as rent, mortgage, utilities, insurance.
• Flexible Expenses: These can vary month to month and may include food, transportation, entertainment and dining out.
• Debt Payments: If you're required to pay on student loans, credit cards, personal loans or any other type of debt, include those here.

After collecting this information, subtract your total expenses from your total income. This will tell you if you’re living within your means, overspending, or have extra money that you can save or invest.

2- Set Financial Goals

A budget without a target is a ship that’s sailing too nowhere. Having clear financial goals will move you toward them and keep you motivated to stay with your budget. You generally have one of three types of financial goals:

• Short-To-Long-Term Goals (Under 1 Year): This could be things like building an emergency fund, saving for a vacation or paying off credit card debt.
• Medium Term Goals (1-5 years): For saving for the down payment on a house, purchasing a car, or paying off large amounts of debt.
• Long-term goals (5+ years): Long term goals might include retirement savings, education costs for your children, or buying an investment property.

Set clear goals, as you possibly can. For instance, rather than expressing, “I want to save more money,” instead say “I want to save $5,000 for an emergency fund by the end of the year.”

3- Pick a Method for Budgeting

And there are plenty of budget systems that you can follow based on your personal tastes and lifestyle. Here are a few popular ones:

    a- The 50/30/20 Rule: This easy and common budgeting technique is a lot:

• 50% of the income  to need (rent, utilities, groceries).
• 30% (wants: entertainment, dining out, hobbies).
• 20% toward savings and debt repayment.

The 50/30/20 rule is a great choice if you’re interested in a balanced mix of flexibility and structure in your style of managing money without needing to account for every single expense.

    b- Zero-Based Budgeting: In a zero-based budget, every dollar you make is given a job, shrinking your income minus expenses to zero. This approach does involve an awful lot of tracking, and it’s probably best if you want very fine-grained control over where your money is going. In zero-based budgeting, you must explain every dollar being spent, which can help pinpoint areas where there is unnecessary spending.

    c- Envelope System: Envelope system: In the envelope budgeting system, money for different categories (like groceries, entertainment or utilities) is put into designated envelopes. When an envelope is empty, you can spend no more on that category until the next budget. This is a fantastic system for people struggling to get a handle on discretionary spending.

    d- Pay-Yourself-First Method: This approach depends on savings above all else. You automatically save, invest or contribute, as a fixed proportion of your income. Remaining income is earmarked for living expenses. The pay yourself first approach works well for people with substantial savings goals and sufficient income to easily cover costs.

Select the one that works best with your financial situation and how dedicated you are to controlling your spending.

4- Track Your Spending

Once you choose a method of budgeting, the second part is to track your spending to see if you are staying within place of your budget. There are many methods to follow your spending, so choose one that works best for you:

• Manual Tracking: You can keep a manual track of your expenses in a notebook or spreadsheet. It’s a bit of a time that sucks but if you want total power over your budget, this is the way to go.
• Budgeting Apps: Many popular budgeting apps (Mint, YNAB, Every Dollar) let you link your bank account and automatically track spending by category.
• Bank and Credit Card Statements: Several banks and credit card issuers offer spending analysis features which will categorize all your expenditure.

Regardless of which method you select, just be consistent. Monitor your spending along with your budget and make changes as necessary.

5- Make Adjustments

No budget is perfect when it’s first drafted, and that’s fine. After you’ve tracked your spending for a few months, check your budget to see how well it’s working for you. So, what questions should you be asking yourself?

• You continue to overspend in some of the categories?
• Are you low-balling some of your fixed or variable costs?
• How about that savings goal?

You can readjust your budget in order to save by cutting in some places, or by giving yourself more money in the areas in which you have underestimated how much you’ll need. IF you would rather spend money on frivolous items, maybe your priorities need a second look.

6- Save for a Rainy Day

An emergency fund is a financial cushion that helps you pay for unplanned expenses without getting into debt. You generally want to have at least 3 to 6 months’ worth of living expenses stashed in your emergency fund.

Here’s how you can begin building your emergency fund:

• Set a savings goal: Add up how much money you would need to pay for your essentials (your rent, utilities, groceries and transportation) for 3 to 6 months.
• Contribute Monthly: Deduct a fixed percentage of your monthly income and consider it as your mutual fund EMI.
• Automate Savings: Create an automatic monthly transfer from your checking account to a specific savings account exclusively for emergency purposes.

You can then begin to divert your savings contributions elsewhere once your emergency fund is fully funded.

7- Pay Off Debt

Debt is a serious impediment to financial success and a great budget can help you pay it off much quicker. There are two popular ways to attack debt:

    a- Debt Snowball Method: In this strategy, you prioritize putting extra toward the smallest debt while making the minimum payment on larger debts. Then when the smallest debt is paid off you move onto the next smallest, gaining momentum and motivation as you wipe your debts out one by one.

    b- Debt Avalanche Method: With the debt avalanche method, you focus on paying off the debt with the highest interest rate first. It’s a strategy that will reduce the amount of interest you pay overtime, but it may take longer to feel progress with the highest-interest debt is high.

Just pick a strategy and commit to putting additional money toward paying down your debt each month.

8- Keep Your Budget Up to Date

Budgeting isn’t a one-and-done job; it’s an ongoing practice. Check in on that budget at least once a month and make sure you’re still on track toward reaching you are spending and savings goals. Big life events - like a job loss, promotion, new baby, or house purchase - might mean you have to re-evaluate your budget.

Learn how to budget for your financial well-being. Learning how to create and abide by a budget can help alleviate financial stress, pay off debt, save for the future and meet your long-term financial goals. It might be time-consuming, and you may have to be disciplined, but it’s so worth it.