Budgeting 101: Basics every beginner should know

MMadelyn August 26, 2023 1:01 PM

Budgeting, some people think, is a word that's synonymous with a restrictive lifestyle. But that couldn't be further from the truth. In reality, budgeting is about gaining control over your finances, not about limiting yourself. It's about understanding where your money goes and making informed decisions about spending and saving.

Let's start with what is budgeting? In simplest terms, budgeting is the process of creating a plan to spend your money. It's a financial plan that balances your income against your expenses.

How to start budgeting

Creating a budget might seem overwhelming at first, but it doesn't have to be. Here are some basic steps to start your journey to financial freedom:

  1. Track your income and expenses: Start by making a list of your income sources and all your monthly expenses. This will give you an idea of where your money is going.

  2. Categorize your expenses: Break down your expenses into categories like rent, groceries, entertainment, etc. This will help you see where you can cut back.

  3. Set financial goals: Have a clear goal in mind. It could be saving for a home, a vacation, or simply building an emergency fund.

  4. Create a budget plan: Based on your income, expenses, and goals, create a budget that suits your lifestyle.

  5. Stick to the plan: It's one thing to create a budget, but sticking to it is the real challenge. Discipline is key.

Budgeting techniques

There are various ways to budget. Here are some popular budgeting techniques:

  • 50/30/20 rule: This rule suggests spending 50% of your income on needs, 30% on wants, and 20% on savings and debt repayment.

  • Envelope system: This method involves dividing your income into different envelopes for each category of expenses. Once you've spent all the money in one envelope, there's no more money for that category for the rest of the month.

  • Zero-based budgeting: This technique requires that every dollar of your income be assigned a job, whether it's for expenses, savings, or investments.

Tracking your expenses

Keeping track of your expenses is crucial to sticking to your budget. There are plenty of apps and tools available to help you track your spending. Alternatively, you can also use a simple spreadsheet. Here's an example:

Category Amount Spent
Rent $800
Groceries $200
Entertainment $100
Savings $300

Budgeting may not sound exciting, but it's a powerful tool to achieve financial independence. So, start budgeting today and take control of your finances.

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