Budgeting 101

Budgeting

Definition

A budget is a plan for how to allocate income towards expenses, savings, and debt repayment.

Importance

Budgeting helps individuals:

• Manage finances effectively
• Achieve financial goals
• Reduce financial stress
• Make conscious spending decisions
• Avoid debt and overspending

Steps to Create a Budget

1. Track income and expenses: Record all income and expenses for a month to understand spending habits.
2. Set financial goals: Identify short-term and long-term goals, such as saving for a emergency fund or paying off debt.
3. Categorize expenses: Divide expenses into needs (housing, food, utilities) and wants (entertainment, hobbies).
4. Assign percentages: Allocate a percentage of income to each category based on priority and importance.
5. Create a budget plan: Based on income and expenses, create a plan for how to allocate funds each month.

Budgeting Methods

• 50/30/20 rule: Allocate 50% of income towards needs, 30% towards wants, and 20% towards savings and debt repayment.
• Envelope system: Divide expenses into categories and place the allocated cash into labeled envelopes.
• Zero-based budgeting: Start with a "zero balance" and allocate every dollar towards a specific expense or savings goal.

Common Budgeting Mistakes

• Not accounting for irregular expenses (e.g., car maintenance, property taxes)
• Underestimating expenses
• Not regularly reviewing and adjusting the budget
• Not prioritizing needs over wants