Every person should know about the basics of budgeting from an early age as these are life lessons that will always help you in real-life situations.
The concept of budgeting is very crucial as it helps individuals look at their monthly incomes closely and create a clear action plan about the amount to be spent, saved, and kept handy for emergencies.
Having a deeper understanding of the basics of budgeting helps individuals to achieve their financial goals reasonably faster and easier compared to people who spend randomly without a concrete plan in place.
What is Budgeting?
Budgeting is a financial plan or a realistic report that helps to provide clear estimates of earnings and spending for a given period.
Budgeting helps to address an individual’s financial situation, see the difference between needs and wants, and create an action plan that will help him reach financial goals and stability.
What are the 7 steps of budgeting?
Step 1: Know your “take-home” pay
The basics of budgeting start with knowing what your “take-home” pay is. This is the monthly amount you receive after paying off the taxes.
Once you identify the amount you have in hand it becomes easy to lay the groundwork for the spending and savings.
Salaried people generally have a fixed income whereas self-employed individuals with inconsistent income must look at the lowest monthly income they have earned in the last year and use it as a base for the monthly budget plan.
Step 2: Choose the budgeting strategy
There are several ways to budget but one should always choose the budgeting method that suits his personal needs and requirements and will work for him the best.
If you are new to budgeting then choose the simplest basics of budgeting method “50/30/20 strategy”.
The “50/30/20 strategy” requires you to divide your income into three segments 50% for needs, 30% for wants, and 20% for savings.
The needs refer to necessities like food, rent, transportation, car payments, daycare expenses, child support, student loans, medications, repairs, credit card payments, and utilities.
Wants are expenses incurred for vacations, shopping, entertainment, dining out, and savings to the money deposited for a retirement fund, education corpus, or debt payoffs.
Contact the experts on the Edufund app to create an effective budgeting strategy that will meet your needs and help to save for a retirement fund or create an education corpus for your child.
Step 3: Set aside for margin of error
It is not easy for every person to stick to the budgeting plan and keep track of spending religiously. Individuals should set aside some amount for error every month as it will give flexibility and serve as a breathing space in the budget.
This does not mean that you have the luxury of overspending every month hence make sure that you do not have to use that amount until it is necessary.
Step 4: Set automated savings
Once you start paying for your needs sometimes it becomes difficult to put aside an amount for your savings. Set up automated savings so that as soon as the monthly salary cheque is deposited the required amount is transferred automatically from your bank to the savings schemes.
This budgeting method is best for people who consider savings as their priority. It is referred to as “paying yourself first” and helps individuals save the required money even before they start spending on the necessities.
Step 5: Use professional help or a budgeting app
Use a budgeting app or professional help like the ones provided by Edufund App if you are finding it difficult to create a budgeting plan.
Step 6: Track your progress
Budgeting is nothing but a spending plan that helps to keep things in perspective. The method encourages you to divide your money based on requirements at the forefront so that everything can go as per the plan and there is no overspending.
Knowing about the basics of budgeting will make the road to achieving your plan easier hence track your progress diligently to see what is working for you and where you are struggling.
At the onset, it is better to keep track of your expenses daily and gradually to weekly or to a 2-week.
Keep yourself in check by spontaneous assessments so that there are no goof-ups. Once your budgeting is on track you can shift to longer intervals.
Step 7: Assess and adjust
Nothing is fixed in life hence give yourself room to assess and adjust if things are not going as per the plan or if there is a change in your income or expenditure structure.
Conclusion
When you have a grasp on the basics of budgeting then it will help to take a systematic approach to monitor and control finances and reach your financial goals easily and much faster.
