Budgeting

What is a Budget

Budgeting - “the process of calculating how much money you must earn or save during a particular period of time, and of planning how you will spend it”

Budgeting is creating a plan that will help you manage your money - a budget.

Why is a Budget

Having clear plan and easy to understand visualisation, which tells you how much money you have available, and also where does it go can help you make responsible financial decisions and avoid overspending. Moreover by planning what to do with the money before actually getting to spend it, can help us put it to better use by giving us more time to think.

Advantages of creating a budget:

Tracking your expenses
Setting realistic viewpoint on your money
Planning to achieve your goals
Avoiding debt

How is a Budget

First Step

Available tool options for creating a budget:

Pen and paper - free form
Fillable sheets - ready templates
Spreadsheets - unlimited power
Apps - ease of use

Popular apps - Mint, YNAB, Mobills, EveryDollar

Second Step

Analyse and evaluate your income from all sources.
Then calculate the budget for your needs, taking into accounts all necessary expenditures.

To track your spending it’s useful to look at your bank account’s past month history, or to track your spending for some time before.

Third Step

Pick an appropriate strategy

The 50/30/20 Rule

The core of this strategy is dividing your income into three uneven parts. where 50% goes towards your needs, 30% towards your wants, while the remaining 20% is put into savings

Pay Yourself First Method

This simple method has one core principle - the first transaction each month is for your savings, and then you can use the rest as you please.

This method’s main aim is to ensure savings without being restrictive. It can be easily used with other methods

Zero-Based Budget

In this method, every single piece of your income is assigned to a specific expense before each budgeting period. You create small specific funds based on expectations and calculations.

This method ensures that your money is spent thoughtfully, and that not a bit is left unproductive

Envelope Budget

To create an envelope budget, you prepare a few physical/abstract/virtual envelopes that are connected to different spending categories. You can spend money in each budget category only as long as there’s still money in the envelope.

Fourth Step

Track your expenses, again using one of the tools provided before. This is crucial to make the budget work and collect data

Fifth Step

Manage any negative balances in your budget - having a negative balance in any of the categories your budget entails calls for either changing the budgeting method, adjusting your spending, or looking for ways to increase your income.

Ways to increase income:

Changing jobs
Taking more hours
Starting a side hustle

Decreasing spending - expenses can be broadly categorised as fixed expenses - rent, insurance, fixed bills - and variable expenses - utilities, groceries and such. While you can’t usually reduce your fixed expense budget, the variable expenses depend on your decisions and can be very high or very low depending on how frugal you are.

Another short term solution is to move the funds from a different category over, to the one that is negative, but that should not be a repeated occurrence as it contradicts the idea behind your budget.

My Mind🪴

Explorer

Introduction to Budgeting