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Budgeting

What is Budgeting?

Budgeting is the act of planning the allocation of your income for some time, often a month or year. It involves setting specific financial goals, estimating your income, and planning how to allocate your money to meet your expenses and savings objectives.

Why Budget?

Budgeting has several benefits:

  • Keeping track of your expenses allows you to identify things you might want to cut. Do you have a subscription you forgot to cancel? Maybe spending too much on clothes? Budgeting can help you identify and address those things, leaving you more money to work with. 

  • It helps you understand yourself. What are your current goals? What are you prioritizing as you try to adjust your spending? What’s important for you and what isn’t? How long would you like to take to save up to goals? How you use your money says a lot about your values and personality. 

  • It helps allocate money to meet financial goals. Are you a salaried worker looking to buy a car? Or a teenager trying to save up his allowance for new shoes? Budgeting helps you plan your spending and saving to reach your goals. 

  • It helps you maintain realistic expectations. By laying out your income and expenses, you get a clearer picture of how long it might take to reach your financial goals. 

  • Planning your spending reduces impulse purchases (buying things on a whim). Having set goals and amounts for use encourages you to genuinely consider if you want to spend it on a product. In turn, you are less likely to spend recklessly.

The Budgeting Process

There are various methods of budgeting, some of which will be discussed in this article. However, there are some things to do using any procedure: 

  • Determine your income in a given period by finding your net income (income - taxes).

  • List out your expenses. Think of utility bills, gym subscriptions, and groceries. 

  • Create allocation categories. For example, needs, wants, and savings. 

  • Decide how much money each category gets,

  • Consistently track spending and income and adjust your plan accordingly. Have you gotten a raise or a pay cut? Has prices increased? Have you bought something unplanned? Those scenarios mean your plan needs to be changed. 

  • Stick to the plan! A good idea requires good execution.

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TL;DR

  • Budgeting is the act of planning the allocation of your income for some time.

  • It helps you find out where to cut spending, create realistic goals, prevent impulse purchasing, and better understand yourself.

  • It can be helpful whether you are an adult with an income or a kid with an allowance to reach financial targets.

  • There are many budgeting strategies.

  • Generally, you must find your net income, list expenses, categorize spending, and consistently keep track of your money. 

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