Dear Recent or Soon to be College Graduate, Learning budgeting basics should be one of your next goals. Why focus on budgeting now? Well, you’ve completed a chapter in your life, in which you’ve been supported and had financial scaffolding and now you’re stepping into a new world of financial independence. This transition can be both exciting and overwhelming. So today, I am going to discuss some basics of budgeting.
Getting Started with Budgeting Basics
What is Budgeting?
Budgeting is essentially creating a plan for how you will spend your money. This is important because, if you don’t make a plan that benefits you, others will have plans for your money that will benefit them. Instead of marketers and influencers influencing and, for some, controlling where your money goes, you make a plan for your money. That plan is called budgeting.
Budgeting involves tracking your income and expenses to ensure you’re living within your means and saving for your future goals. Put another way, the goal of budgeting is to create a clear picture of your financial situation and make informed decisions about how to allocate your resources.
Why is Budgeting Important?
Budgeting is important because it helps you understand where your money is going, where it needs to go, and where you want it to go. For example, budgeting allows you to plan for paying off student loans, credit cards, and other debts. It helps you to build pots of money for things such as emergencies, and retirement. Not insignificantly, budgeting also helps to reduce financial stress by giving you a clear plan for managing your money.
Getting Started on Budgeting Basics
Before you create a budget, you need to have a clear understanding of your financial situation. Start by listing all sources of monthly net income, including your salary, side hustles, or any other net earnings. (Net earnings are your earnings after taxes are taken out.)
Next, track all your monthly expenses to see where your money is going. Your expenses come in three types.
There are fixed expenses such as rent, mortgage, insurance, loan payments, and other regular bills.
Second, there are variable expenses such as groceries, dining out, entertainment, fuel for your car, and personal care.
Last, there are occasional expenses such as annual or semi-annual expenses such as car maintenance or a birthday gift for someone of major significance in your life.
Now That You Know What Your Money Has Been Randomly Doing, It’s Time to Make a Plan for It
Remember, a budget is essentially a guide for managing your finances, serving as a strategic plan that guides how you allocate your money to meet your goals and needs. It involves a detailed breakdown that ensures that every dollar is purposefully directed towards essential costs, savings, and discretionary spending.
There are several popular budgeting methods. Today, I am going to share a method referred to as the 50/30/20 Rule. (There are other methods of budgeting. If this method does not work for you, that’s alright. Try another method. Choose the method that best suits your financial goals and lifestyle.)
50/30/20 Rule:
- 50% Needs: Allocate 50% of your income to essential expenses like housing, utilities, and groceries.
- 30% Wants: Use 30% for non-essential expenses such as dining out, entertainment, and hobbies.
- 20% Savings and Debt Repayment: Reserve 20% for savings, investments, and debt repayment.
When using this way to budget, work to adjust the money to fit into these percentages. For instance, if you are spending more than 50% of your income on your needs, look for ways to cut those expenses. Is there a way to cut your housing expenses? Perhaps take in a roommate? Temporarily move back home with parents? Can you become more frugal with utility usage and/or groceries?
To have enough left for the other two areas of spending, you may need to cut your wants spending, too. Perhaps cutting restaurant food and focusing on free and frugal entertainment.
These ways of cutting your needs may sound tough, maybe even draconian to some of you. But, remember, it’s only temporary, until you reach your goal.
Track It
Once you create the budget you have to track your spending to make sure that you stay on top of it. You can do the tracking in several ways. Some people use budgeting apps like Mint or YNAB (You Need a Budget).
But, I prefer to keep track of my money manually. You can keep track of your money manually by using your bank and credit cards statements and receipts to manual tracking. You can then take this information and enter it into spreadsheets and/or journals. (I love spreadsheets!)
Once You Can See Where Your Money Is Going
Let me emphasize: Once you can see where your money is going, your goal is to get rid of all consumer debt, and to have enough money to invest in assets, which will in turn, increase your income. Your end game with budgeting is to have money left over after your necessary expenses to use for your financial goals, including fun expenses.
Budgeting Basics: First Things To Do With The Money That You Are Not Spending On Necessities
Once you have money left over after paying for your necessities, what do you do with the leftover money? Well, what you don’t do is spend it on Louis Vuitton, Gucci, or a fancy car. Instead, there are some options that you will become dated.
You can use this money to make your financial situation better.
First, you can use this money to set yourself to be safe from being ruined by small unexpected expenses. You do this by building an emergency fund.
Second, pay down debt. Focus on reducing high-interest debt, such as personal loans and credit card balances.
Third, contribute to your retirement savings, like a 401K. Even small, regular contributions can significantly grow over time thanks to compound interest.
After you put money toward these first three areas, it’s time to invest. I personally would start by considering investments in an S & P 500 ETF and treasury bonds.
Next, you can do some charitable giving. Donate to causes or organizations you care about. Remember, one of the most important reasons to win big with your personal finance is to be able to give big.
Other things that you can use your money for include health and wellness, short-term goals, and long term big goals (like buying a house.)
But, be sure to treat yourself occasionally, for a budgeting job well done.
Budgeting Basics: 7 Key Takeaways
- Budgeting is essentially creating a plan for how you will spend your money.
- Budgeting is important because it helps you understand where your money is going, where it needs to go, and where you want it to go.
- Start by determining your monthly income from all sources and your all of your expenses both fixed and variable, monthly, semi-annual, and annual.
- One method of budgeting is referred to as the 50/30/20 Rule.
- There are several methods of budgeting. If one method does not work for you, try another method.
- Once you create the budget you have to track your spending to make sure that you stay on top of it. You can do it manually or with an app.
- Your goal is to get rid of all consumer debt, and to have enough money to invest in assets, which will in turn, increase your income.
There you have it…budgeting basics. Remember, a budget is just a plan, which allows you to be in control.
You can control your money. Just, focus on one step at a time, and always try to do a little better than yesterday.
You can do it! I have faith in you.
Hugs,
Rich Mom
If you would like to read more about personal finance, check out:
SMART Financial Goals: Stay on Target
Building Wealth In Your Twenties
Looking for a budgeting app? You can check out:
Who is Rich Mom?
If you stumbled upon this post and you are wondering who Rich Mom is, check out my “About Rich Mom” page.
Also, please note: I am not an investment advisor. Always do your own due diligence and research before investing. Check with your own investment advisor.
Also, remember that past performance is not a guarantee of future performance.
The information shared here is not intended as financial advice, just entertainment and entertainment.