What Is Budgeting and How Can You Start?
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What Is a Budget?
Types of Budgets
Zero-based budget The point of this budgeting method is to make income equal expenses. You assign every dollar you earn toward expenses and financial goals like saving and debt repayment, so that you end up with $0 at the end of the month. Pay-yourself-first budget With this approach, you set aside a lump sum of or percentage of your income for your savings and debt repayment goals before allocating the rest of your money towards living expenses and discretionary spending. Doing this ensures that you’re preparing for the future and building a habit of saving and investing. 50/30/20 budget With this type of budget, you allocate 50% of your income towards essentials, 30% towards discretionary expenses (like dining out), and 20% towards financial goals like paying off debt, saving, and investing. We’ll go into more detail on this approach below.
Why Is Budgeting Important?
Income vs Expenses
Income This is everything that comes into your bank account each month, including paychecks, bonuses, interest you’re earning on savings, alimony payments, and any money you bring in from freelancing or side gigs. Expenses This is everything that goes out of your account each month – from the cash you spend on afternoon lattes to essentials like rent and utilities to the money you contribute to your retirement account.
Budgeting vs Forecasting
50% of Your Income on Needs
Groceries Housing Basic utilities Transportation Insurance Minimum loan and credit card payments (anything beyond the minimum goes into the savings and debt repayment category) Child care or other expenses you need so you can work
30% of Your Income on Wants
20% of Your Income on Goals
Starting a Budget Plan
1. Calculating Your Net Income
2. Understanding Your Spending Habits
Fixed expenses These are regular monthly bills, such as rent or mortgage, utilities, and your car payments) Your variable expenses These are the ones that may change from month to month, such as groceries, gas, and entertainment. This is an area where you might find opportunities to cut back.
3. Add a “Pay Yourself” Spending Category
Building an emergency fund Paying off debt Maxing out your retirement contributions Saving up for a major purchase
4. Creating a Budget Plan
5. Tracking and Modifying Your Budget
3 Money Tips
Frequently Asked Questions
About the Author
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