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Budgeting 101

Save Money. Become Rich

By Zain RehanPublished 2 years ago 7 min read
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Budgeting 101
Photo by Kelly Sikkema on Unsplash

Everyone will admit that managing personal finance is no easy task, especially for lazy people like me. After trying to get rid of all that laziness out of my life, I realized that budgeting is essential because it helps you be in charge of the money rather than it being the other way around.

Considering you all are here, you either do not know about budgeting or want to learn how to do it. You are in the right place. This article will be covering:

• What is a budget, and why should you have one?

• Steps To Create A Budget

• Advantages and Disadvantages of a budget.

• Types of budgets.

• Importance of a budget.

What Is A Budget And Why You Should Have One?

I have always been super organized (does not go with lazy, yes, I know). I read up on budgeting, and honestly, I may have slept, accidentally. I really hope that does not happen while reading this. So, the book definition of a budget is

"A budget is a formal statement of estimated income and expenses based on plans and objectives."

Budgets are explained differently by everyone, but it is not as complicated as people make it seem. Although the definition is dry and not uplifting, the purpose of a budget is to tell what you can buy or sell with your income. Admit it or not, a lot of us go "over the budget," which is when you buy more stuff then you can afford.

Furthermore, a budget helps you keep track of your expenses; this helps you spend your money more wisely. This will make room for more savings, which you could finally use on that vacation you really wanted to go to. Budget is no easy task; it requires a lot of perseverance and persistence, which means goodbye to be lazy.

As months go by, and you make budgeting a natural habit, you will control your expenses and eventually become the "Budgeting Master."

Steps To Create A Budget

Do you finally have a basic understanding of what a budget is? If yes, we can finally start talking about the very foundations that make up a budget. After going through these steps thoroughly, you should be able to make your own budget from scratch.

1) List down Expenses

I always break down expenses into two parts fixed and variable cost. This is a good starting point to start making a budget as it helps to allocate your spending into semi categories. Fixed costs are those expenses that remain the same throughout, like rent, insurance, or phone bills. On the other hand, variable costs vary or change according to usages, like eating out groceries or entertainment places.

To calculate the exact tally for your expenses, you can refer to the previous month's bank statements to get a rough idea. This way, you may not forget to add a certain expense saving you the trouble. I would recommend you jot down these expenses either daily or weekly. This will make your life easier, and it will help you to stay up to date.

2) List down Income

If per se you can not track how much you have spent in a particular month, you could subtract it from your income. Income is money you receive, like for a job, rental income, or monthly interest for that matter. You should also list down the income you received after-tax, as that is the actual amount you actually receive.

Again, with the case of income, I recommend breaking it down into either weekly or monthly, as it is easier to track your budget.

3) Track Your Spending And Make Adjustments

Now that you have all your expenses and income in one place, you should again recheck if you have not missed anything important. Lastly, it would be best if you subtract your income from your expenses. I would recommend you do it monthly if you are doing it for the first time.

If your total income is greater than your said expenses – bravo! This means you have extra cash, which you can save or pay out your debt.

However, if your total income is less than your expenses, then you are kind of in trouble. It means that you are spending more than you earn.

If you are spending more than you are earning, you must reduce your variable expenses or prefer cheaper alternatives for the things you buy.

The above steps are some basic steps towards budgeting, which should be followed. Below under "Types of Budgets," I have listed down three widely used methods around the world.

Types Of Budgets

Spoiler alert! There are way more than the 3 types of budgets I have mentioned, and it is technically impossible to go through all of them. So, I shortlisted them into three types: the most effective types of budgets for people.

50-20-30 Budget

I feel that this method or rule can be applied to most people as it has a degree of leniency and, at the same time, helps you be a bit more conservative.

This method's fundamentals are simple as you can spend up to 50% of your disposable income (income after tax) on your necessities such as rent, utilities, food, or insurance. You can spend 30% of your disposable income on your variable costs or "wants." This pertains to things that make your life more wholesome, like entertainment, cinema, or concerts, for that matter. The last 20% Is allocated in terms of savings to pay off your debt or outstanding payments from last month.

I feel like this budget type is very flexible as it gives you more control over your money and spending. Now rather than spending more than your total income, you could save a lot and maybe go away for a mini-vacation by any chance.

The 60% Budget

This method's basics are straightforward as you can spend 60% of your disposable income on essential expenses like rent, utilities, food, or insurance. The remaining 40% is allocated into 4 categories: retirement, long-term saving, short-term savings, and vacation savings.

Zero-Based Budget

The Zero-Based Budget is when your total income equals your expenses. This helps provide every single dollar a purpose or a job; this keeps you from spending money. I believe that this method helps you stay closer to your financial goals and payout your debt. The best part about this method is that every dollar is accounted for to reach your goal faster.

This is the most challenging of the three types of budgets as it requires much perseverance not to do excess spending. I would recommend writing down your main financial goals and try following them whenever you have excess money. Say no more to impulse spending.

Advantages and Disadvantages

Some of you might be disappointed or still lazy even to try to start making a budget. I hope this changes your mind

Disadvantages

- Saying no to something you really want is not easy.

- Lower flexibility to spend on "want" goods.

- You might come across a financial emergency like hospital bills or car bills etc.

- You must set aside some time to make a budget.

- Changes in your lifestyle

Advantages

- You become in charge of the money, not the other way around.

- Your life becomes more stable.

- You reach your financial goals.

- Your stress levels decrease as your debt decreases.

- You have enough savings to help you in time for crises or emergencies.

Conclusion

All being said, it is not easy to implement a type of budget into your life. Although making a budget is one of the most rewarding things in your life, it helps you become more responsible and makes you feel more in control. The world is moving extremely fast, and budgeting helps the world to slow down a bit. Budgeting has and will always help you out in times of emergencies like covid-19. As a student budgeting is essential it can prevent you from being completely broke to being well over brokenness (if that’s a word). Try it maybe download the Buddy app on app store or any budgeting apps tbh it is easy to use.

It would be best if you aimed at budgeting weekly or monthly because, believe it or not, a solid budget can change your life. I believe budgeting might help you move closer towards your dream and do not; we all want that. In this case not being in debt.

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About the Creator

Zain Rehan

An aspiring writer trying to follow his passion - writing.

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