Moneyadviceblog » Budgeting » Budget 101

A budget is a revenue and spending plan for a specific period that is generally prepared and updated regularly. Budgeting is essential for managing monthly costs, preparing for life’s unforeseen circumstances, and purchasing important things without falling into debt.

Budgeting has various advantages. Knowing that you have a solid monthly budget to rely on will offer you the assurance and peace of mind that you’re controlling your finances. It will allow you to focus on your financial objectives, plan for the future, and work towards a goal, allowing you to make large purchases such as homes and vehicles without stress.

1. Pay-yourself-first budget

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Watch Your Expenses.

‘Pay yourself first’ is a reverse budgeting technique that is designed to help you create a spending plan around savings goals, such as retirement. In this plan, savings are prioritized, but not at the price of essential needs such as rent, electricity, and insurance.

To begin you need to examine your expenses. To make this budget successful, you’ll need to plan ahead. Examine your bank and credit card statements to see how much you spend regularly. The next step is to examine your financial goals. What would you like to see your money go? How much do you feel at ease putting into an emergency fund if you don’t already have one?

It’s easier to figure out how much you need to save when you know your goals. For example, if you’ll need $ 20,000 in 10 years for a house, you’ll need to save approximately $2,000 annually.

To make saving easier you can opt for automatic deductions from your salary, to transfer money straight to savings, retirement, or investment account. After you’ve set it up, you’ll need to keep an eye on the transactions and make adjustments as needed.

2. Envelope system budget


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Try The Envelope System.

The envelope budgeting method splits your money into many spending categories, such as bills, food, and petrol. You will devote a part of your money for each category. You’ll take that amount in cash and put it into an envelope once you’ve chosen how much you should spend on each area. Then, for that category’s expenses or purchases, spend what’s left in that envelope (and only in that envelope).

Examples of possible categories are groceries, gas, health and grooming, clothing, dining out, household products, pet care, and children’s things. Make your categories customized to your circumstances. Make as many categories as you need but don’t make too many of them (you will be confused). Don’t forget to budget for unexpected costs like taxes, insurance, and presents, as well as a savings category.

Be aware that you cannot take cash from another envelope and spend it on a different category. If you do, you’ll be disadvantaged in that category. If you have money left over in any of your envelopes at the end of the month, you may either leave it in that envelope for the next month’s expenditures or withdraw it and put it in savings or an emergency fund.

3. 50/30/20 budget

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The 50/30/20 technique.

For those who don’t have the patience to record their spending in various groups, the 50/30/20 rule budget might be a helpful technique. The 50/30/20 rule budget simply asks you to split your spending into three categories: needs, wants, and debt or savings. This cuts down on the amount of time you have to spend on planning your budget.

How to calculate? Let’s suppose your monthly after-tax income is $6,000 per month. 50 % will go towards you needs, which is $ 3000, 30 % to your wants which is $ 1800 and the rest to your saving and debts.

Unfortunately, due to differing circumstances, such as living in a high-cost-of-living location, the 50/30/20 principle may not work for everyone. However, keep in mind that you may tailor the rules to your own requirements by altering the percentages to suit your unique situation and financial objectives.

It’s essential to consider the various budgeting elements that must be taken into account while creating a budget. Share with us in the comments which one of the above techniques will you adopt.