The Importance of a Budget and How to Get Started
Budget! Budget! Budget! If you are familiar with topics related to personal finance, then I can bet that you have heard this word repeated more than once. Although the word budget is repeated, we brush it off and try not to think about our spending. I know that it sucks to put limitations on your money. Trust me, the last thing I want to do as a 21-year-old is to plan where all my money goes. That said, it is crucial to plan and track the flow of your money to understand how your spending habits run. Budgets help you see where you might be overspending your income or where not enough is saved. Keep reading to learn more about budgeting, how to set a basic plan up, and how to make it as painless as possible.
Now let us assume you live under a rock and never heard of a budget. Budgeting is defined by Google as, "an estimate of income and expenditure for a set period." In other terms, budgeting allows you to track how much money comes in and how much goes out. I know what you're thinking this is boring, or "Why do I want to see how much I spend?" It’s important to budget to help build a healthy habit for spending. The habits you start today will help you in the long term. If you’re constantly spending all your money now and are not aware of where it is spent this can be bad. More than likely you will end up continuing to spend new money as your income grows. Once you graduate from college and start earning, you don't want your lifestyle to inflate with your income. Budgeting also makes you accountable for your money. There are no more external factors to look to when you sit down and analyze how much you’re spending. Making a budget is a great step towards becoming financially independent. Now that you understand the importance of budgeting, let's talk about how to get one started.
Many types of budgets are super basic or super-specific. You aren’t required to use the same plan as me. If you feel another budget style fits your personal needs then use it. I’m going to walk you through my budgeting technique since I started this journey back in 2018. The budget plan that I started with and still use is the 50/30/20 plan. The basic breakdown of this plan is that you budget 50% of your after-tax income on needs, 30% on wants, and 20% is used for savings and investing. This plan is very good to help you get started. As you start to get a better grasp of how your money is flowing through your accounts, you can adjust to your specific needs.
Let's break down each section to understand what should go into each category:
50% Needs: This category is for anything that has to do with keeping you alive. This does not include the beers you are drinking at the party. It does include anything from rent, groceries for yourself, transportation, insurance types, etc. Anything essential that is keeping you alive is included in this category.
30% Wants: This category is fun money. Anything you want to use this on is up to you. For example, you can use this money to go to restaurants, buying gifts, bottle service, etc. You must make sure that this portion of the money isn't going out of control and pulling from the other portions of your budget. You can also save money from this section to help you save for expensive wants.
20% Savings & Investing: This portion of your budget is what it's titled after. I would suggest saving 10% and invest the other 10%. You can adjust this however you like, and if you want to invest more, there is the option.
The budget is a great financial tool to help track spending and start being more responsible with your money. Now that you know the basics. I challenge you to sit down and get your budget started!