Budgeting Basics: A Beginner's Guide to Financial Planning

4.5.2023 | Category: Article

Budgeting Basics: A Beginner's Guide to Financial Planning

Budgeting is an essential part of financial planning. Whether you are saving for a long-term goal or just trying to manage your day-to-day expenses, having a budget can help you achieve your financial goals.

A recent survey by the National Financial Educators Council, only 58 percent of America’s high school students passed a basic financial literacy test. The same study found that 96 percent of respondents would have made different decisions pertaining to their higher education if they were more aware of the repayment process.

This lack of education can make it challenging for individuals to make informed decisions about their finances and achieve financial stability. As a result, it's essential to take advantage of available resources and educational opportunities to develop a better understanding of personal finance and make informed financial decisions.

That’s why in on March 9, 2004, Senate Resolution 316 was passed, officially designating April 2004 as "Financial Literacy Month." The purpose of this designation is to raise public awareness about the importance of financial education in the United States and the serious consequences associated with a lack of understanding about personal finances.

Why Budgeting Is Important

Budgeting is important because it helps you take control of your money. When you have a budget, you know exactly where your money is going and can make informed decisions about how to spend it. 

Budgeting also helps you prioritize your expenses and can prevent you from overspending or going into unwanted debt.When you have a budget, you can plan ahead for upcoming expenses, such as car repairs, medical bills, or vacations. 

This can help you avoid financial surprises and ensure that you have enough money set aside to cover these expenses when they arise. A budget can also help you plan for long-term goals, such as paying off debt or saving for a child's education.

Creating a Budget

To create a budget, you need to determine your income and expenses. Your income includes your employment pay and any other sources of income. Your expenses include everything from rent or mortgage payments to groceries, utilities, and entertainment. Once you have a clear picture of your income and expenses, you can start creating a budget. 

There are several methods for creating a budget, including the 50/30/20 rule, zero-based budgeting, and envelope budgeting.

The 50/30/20 rule is a popular method that suggests dividing your after-tax income into three categories: 50% for needs (rent, utilities, groceries), 30% for wants (entertainment, dining out), and 20% for savings and debt repayment.

Zero-based budgeting involves assigning every dollar you earn to a specific category, ensuring that you have a zero balance at the end of each month. This method helps you track your spending and prioritize your expenses.

Envelope budgeting involves dividing your cash into different envelopes labeled with specific expenses, such as groceries, entertainment, and transportation. You can only spend the cash in each envelope on the designated expense, ensuring that you don't overspend in any category.

Whatever your preferred method of tracking your income and expenses, it’s easier than ever to monitor with apps and online banking. Make it a daily habit to check your finances and keep a pulse on your spending. 

Setting Smart Financial Goals

By setting personal financial goals, you can create a roadmap to achieving financial stability, security, and ultimately, financial freedom. Set realistic short term and long term goals to you build healthy financial habits. Then, design a budget that aligns with your goals and allows you to save consistently. 

To budget for a large purchase like a house, determine your budget and research the market. Save for a down payment, get preapproved for financing, and factor in closing costs. Plan for ongoing maintenance and repairs, unexpected expenses, and shop around for the best deal. These tips will help you budget effectively and avoid overspending or unexpected expenses.

Finally, consider using Use the SMART framework to make your goals measurable, achievable, relevant, and time-bound. For instance, if you want to save for an emergency fund, set a goal of saving $5,000 within a year by saving a specific amount each month.

Sticking to Your Budget

Creating a budget is only the first step. Sticking to your budget requires discipline and self-control. To make it easier to stick to your budget, consider automating your savings and bill payments. This can help you avoid late fees and ensure that you are saving routinely.

It's also important to track your spending regularly to ensure that you are staying within your budget. There are several budgeting apps and tools available that can help you track your spending and stay on track. Regularly reviewing your progress towards your financial goals helps you stay motivated and make necessary adjustments to your budget or strategy. 

Lastly, find an accountability partner, like a roommate or partner, or join a financial community to share your progress and challenges, and stay motivated. Celebrate your achievements along the way, no matter how small, to stay focused and motivated to reach your next financial goal.

Finally, don't be too hard on yourself if you slip up. Budgeting is a process, and it can take time to get the hang of it. Be patient and keep working at it, and you will see the benefits of budgeting in no time.