Budgeting (1)

TABLE OF CONTENTS

  • What is budgeting?
  • Myths about Budgeting?
  • Shift your mindset from spending to saving – VERY IMPORTANT 
  • 70-20-10 Rule
  • 50-20-30 Rule
  • Building a Buget
  • TIPS

WHAT IS BUDGETING?

According to Wikipedia, a “budget” is a financial plan for a defined period, often one year. It includes costs and expenses, revenues, assets, liabilities, and cash flows. Each company, government, family, and other organizations use budgeting, and they are re-evaluated on a periodic basis.

In personal finance, an individual or a family needs to manage monthly expenses, set up emergency funds, and afford anything from a wish list like a car, house, etc., and would need budgeting to avoid incurring any new debt. Having good control over your finances in the short and long term would require knowing where your money is going.

MYTHS ABOUT BUDGETING

1. I DON’T NEED TO BUDGET

Most people are under the assumption that we don’t need to budget as we are aware of our income, spending habits, and expenses. But this might not be true for a lot of us. If we open our monthly statement, we will find a few transactions that might be impulsive purchases that are not required or don’t come under your NEEDS list for the month.

People who have money left over after the monthly expenses could maximize their savings for retirement, save for a down payment, or pay off their mortgage early. For someone with a major share of their paycheck going towards expenses or debt, it’s very important to focus on budgeting because you can track your expenses each month and prioritize according to your needs, like paying off bad debt, cutting expenses that are not needed like subscriptions, things to splurge on, building an emergency fund, etc. 

2. MY JOB/INCOME IS SECURE

In this current technology era, no one’s job is absolutely safe. There might be downsizing or acquisitions, which could affect the safety of jobs. There is a saying, “Better safe than sorry.” Being prepared for any surprise event that life may throw at us is better than feeling sorry after that happens. You can build an emergency fund that covers 3-6 months of your expenses to have a cushion during a job loss. This can be accomplished if you know your monthly expenses, which can be done using a budget.

3. HAVE NO DISCIPLINE

We are under the assumption that we don’t have the discipline to sit down and track our expenses every week or month. There are a lot of tools that can help with budget tracking, like Mint, Good Budget, Nerd Wallet, etc., that are free. You would attach your bank account, credit card accounts, etc., to track your net worth and monthly expenses. You can also set up automatic transfers from your paycheck to a savings account where you won’t see your money.

Automating your finances and paying yourself first are the best ways to budget. No one likes to sit down tracking each dollar on an Excel sheet every week/month. Instead, you can automate your monthly payments, savings, and investments like 401(k), IRAs, etc. Assign a predetermined monthly amount for your savings goals and debt reduction accordingly. This is an intelligent way to budget instead of saving after the expenses are covered.

4. TRACKING EXPENSES/PURCHASES

With technology taking over our lives, we purchase many things impulsively when we come across an ad or a sale at our favorite store. By tracking our purchases, we’d know our impulsiveness to buy things we don’t need. You can assign a day in the week to check your expenses/transactions on your budgeting application to know where you are spending more than necessary and reduce/cut down those expenses.

5. NO SHOPPING LISTS

Studies have shown that people who shop without lists tend to buy more than necessary. Malls and store layouts are set up so that you impulsively buy stuff you don’t need. Instead, making a list before going to the store would help your budget. Or getting your stuff delivered to your home at a small price would save impulsive shopping costs.

6. NOT GOOD AT MATH

You don’t have to be good at math for budgeting; various free budgeting software like Mint, NerdWallet, etc., can handle this for you. For people who are good at math and want to budget, you can use Excel or a spreadsheet to track your income and expenses.

SHIFT YOUR MINDSET FROM SPENDING TO SAVINGS – VERY IMPORTANT

According to Bankrate’s Annual Emergency Fund Report – Nearly 57% of U.S. adults are worried to cover a $1000 emergency expense.(Source: bankrate.com). When broken down by generation, Gen Zers (85%) and millennials (79%) are more likely to be worried about covering an emergency expense.

Younger Americans haven’t saved as much as their parents or grandparents. Most millennials have never gone through a major recession/depression except for 2008 and 2020. We need to make a mindset shift from spending to saving our money for our goals and financial future. Making compromises in the short term would result in enjoying the life we want in the long term. This could be true in many aspects of life. This is called delayed gratification.

70-20-10 RULE

According to the 70/20/10 rule, you separate your paycheck into 3 different categories based on percentages.

  • 70% of your income goes towards monthly bills and NEEDS like mortgage payments or rent, utilities, phone/internet bills, car payments and insurance, groceries, clothing, medical costs, etc.
  • 20% goes towards saving and investing like 401(k), IRA, emergency fund, stocks/bonds/real estate/crypto, etc.
  • 10% goes toward debt repayment or donation. This could include credit card debt, mortgage payoff, student/personal loans, etc. OR donate to a cause that’s close to your heart.

For example, if you make $2000 a month, this would look like this:

  • $1400(70%) towards monthly expenses and NEEDS.
  • $400(20%) for savings and investments.
  • $200(10%) for debt or donation.

50-20-30 RULE

Senator Elizabeth Warren uses the “50-20-30 budget rule” in her book All Your Worth: The Ultimate Lifetime Money Plan. This plan splits 50% of needs, 30% into wants, and 20% towards savings.

It would be even better if we can reduce the needs and monthly expenses as much as possible and target the saved money every month towards savings or investments, which could reap the rewards down the line.

BUILDING A BUDGET

When it comes to personal finance, budgeting is tracking your income and expenses, eliminating debt, building an emergency fund, and maximizing your investments. According to Dave Ramsey’s Total Money Makeover, the first step is to set up a $1,000 emergency fund. The second step would be to eliminate your debt as soon as possible. The next steps involve maximizing your retirement accounts like 401(k) and IRAs and paying off your mortgage.

Assigning each dollar a job is one of the best suggestions one might find when it comes to personal finance. Assign a job to each dollar before your paycheck is deposited into your checking account. Automate deductions/expenses from your paycheck like rent, utilities, savings, etc. This way, you won’t have money sitting idle in your account, making budgeting easy.

Track your expenses every week/month and reduce purchases that go towards wants instead of needs. You can contribute part of your paycheck towards your goals like debt reduction, savings for a down payment, vacation, etc.

TIPS

1. FOCUS ON YOUR GOALS 

Setting up goals and working towards them is very important for anyone. Achieving our goals makes our lives happy and fulfilling. Goals can be anything from reducing debt, saving for kids’ college, emergency funds, retirement, down payment for a house, paying off a mortgage, financial independence, etc. Focus on the goals and enjoy the process of achieving them.

2. NEVER SPEND MORE THAN YOU EARN

A general rule of personal finance is “NEVER SPEND MORE THAN YOU EARN.” So, budgeting plays a key role as you would be aware of your income, expenses, etc. Review your spending habits to fix your finances. That is the source of the problem. Use budgeting software to help track your spending habits to change your patterns.

3. DEAL WITH EVERYTHING IN CASH OR DEBIT CARDS

One method that works for many people is going old school and paying for everything with cash and debit cards. This is an effective method because you can’t spend what you don’t have. Unlike credit cards, you would need to have funds available for making purchases. This helps us keep track of our money and what we can afford without going broke.

4. EDUCATE YOURSELF ABOUT BUDGET

Educating yourself using books or blogs such as this😉 or watching videos on YouTube regarding personal finance and budgeting can help you with tips to set up the budget that suits your needs. There are a lot of budgeting apps you can use on your phone. Tracking your money is very important, and you can fine-tune the spending part based on your needs.

5. SMALL REWARDS WHEN YOU HIT YOUR MILESTONES

Enjoy the process and treat yourself to small rewards when you hit your milestones. Rewards can be anything you like as long as your budget permits.

6. DELAYED GRATIFICATION

Instead of making impulsive purchases while shopping in-store or online, you can wait 48 hours before you buy something you like. Then, you would know if you needed it or not. Most of the time, you won’t purchase it, or the item goes out of stock. This way, if you still need it, you can go ahead and buy it if and when it’s still available.

7. ONLINE BUDGETING APPS

Our lives have become easier – thanks to technology. Various budgeting apps like Mint, Goodbudget, Personal Capital, NerdWallet, etc., are free and track your income and expenses. Leverage these apps so you don’t have to sit and prepare spreadsheets to track everything. Check your expenses and change your weekly/monthly budget as required.

8. ELIMINATE UNWANTED EXPENSES

Once you can track where your money is going, you can eliminate unwanted expenses like going out to eat, shopping, etc., which come under your wants instead of needs. Focus on the big picture and eliminate expenses that are not required. You can check with multiple insurance providers to reduce your car insurance, home insurance, utility providers, etc.

9. NEGOTIATE CREDIT CARD INTEREST RATES

Credit cards charge some of the highest interest rates, like 24-36% on your balances. You can call the credit card company and ask them for a reduction in the annual percentage rates (APR). You could reduce your interest rate if you have a good credit record.

10. GET ANOTHER SOURCE OF INCOME – RAMIT SETHI

Ramit Sethi suggests it would be better if you could get another source of income. Driving Uber, Lyft, Doordash, and Instacart, selling products online, etc., are a few ways to get more money besides your primary job. This could help you achieve your goals faster.

Post Views: 527