The Complete Guide to Budgeting

Budgeting 101: All About Budgeting

The Complete Guide to Budgeting

People tend to misunderstand the terms "budget" or "budgeting." They feel it somehow puts an impediment on their spending capacity. The truth is, budgeting does not prevent you from spending. Rather, it empowers you to spend, but the right way. It teaches you to spend in a way that shows you as the boss of your money, not its slave. Essentially, it gives you your power. 

It will take some time before you can become a budgeting wizard. This is because there’s a lot that you need to know. But not to worry, this mini book has everything you need to be firmly grounded in this subject. All you have to do is read on. 

What Is Budgeting? 

In the simplest of terms, budgeting is a spending plan. It’s a plan created in advance to guide you on how to spend your money. It’s a plan that seeks to help you better manage your income and your expenses. With this plan, you determine where your money goes and what it does. 

Budgeting is done for a specific period of time. It can be a week, a month, or a year. This spending plan can be created for a business, a person, a group of people, or a government. In short, it can be made for anyone or anything that makes and spends money.

What’s the Purpose of Budgeting? 

Budgeting is about balancing what comes in with what goes out. When your spending is out of balance, you might find yourself in financial trouble. A lot of people do not keep track of their revenues and their expenses, and so may fall into debt without knowing it. 

When your money isn’t enough to do all that you want to do, budgeting allows you to prioritize your spending so that money can be spent on the most important things first. It also helps to prepare you for the unpredictable events of life. 

The Benefits of Budgeting 

Everyone benefits from budgeting, not just those who struggle with tracking what comes in and goes out of their hand. Because budgeting allows you to create a spending plan for your money, it places you in control of your finances and allows you to fulfill your financial goals. The following are the benefits of budgeting: 

• It helps you relate better with money. From how much you earn, you know how much to spend.
• It helps you plan in advance for future expenditures like retirement or vacations, etc. 
• It helps you stay or get out of debt by guarding against overspending. 
• By helping you better manage your finances, it saves you from unnecessary stress. 
• Following a budget means you will always have money for the things that are important to you. 
• It helps you reach your financial goals. 

Static Versus Flexible Budget 

Two types of budgeting are generally done: static and flexible budgets. A static budget does not change over the life of the budget. This type of budget is fixed regardless of anything that happens during the budgeting period. On the other hand, a flexible budget changes with changing circumstances. For instance, a salary increase or the loss of a stream of income. 

Personal Budget Versus Corporate Budget

In terms of use, budgeting can be grouped into two: corporate and personal budgets. Corporate budgets are concerned with expenses made by businesses. Contained in these budgets are capital expenditures, payroll, debt servicing, etc. A personal budget is a spending plan that accounts for one's personal income and expenses. This type of budget covers groceries, transportation, utilities, housing, etc. 

Who Should Budget?

The reality is that everyone should budget. Budgeting helps you better take care of your financial responsibilities, get rid of debt in your life, and be in total control of your finances. 

So, if you live paycheck to paycheck, are in debt, have a bad credit score, have no savings, or generally want to become more financially responsible, you should budget. 

Types of Budgeting 

Zero-Based Budgeting 

This budgeting strategy is about assigning each dollar you earn to a specific financial goal, which can be any of debt payment, savings, or expense. Here, every dollar of yours is accounted for. 

Cash Envelope Budgeting is 

In this case, you assign specific budget categories to individual envelopes. Attached to the envelopes are specific amounts. Once the allocated fund for each envelope is exhausted for that month, no other money must be spent in that budget category. 

Percentage-Based Budgeting 

With percentage-based budgeting, you allot certain percentages to different categories of budgets. For instance, 50% of your after-tax income can go into needs such as monthly debt payments, 30% to wants like investments, and 20% to retirement, savings, and extra debt payments. 

Values-Based Budgeting 

With this budgeting style, you first pay your essential bills. After this, the remaining income is dedicated to other expenses on the basis of their importance for that month. From fitness to vacation to wardrobe changes, these values can shift.

Components of a Budget 

Every bit of money that comes in or goes out in a month must be reflected in your budget. By income, I mean both your main and side incomes. Also, all of the expenses that you plan to make in a month must show up in the budget. 

How to Set Up Your Monthly Budget 

It’s very simple to set up your monthly budget. 

• Start by adding your income that comes in through your paychecks and any other stream. 
• When you’ve outlined your revenue, the next thing is to list all of your expenses (both essential and non-essential). 
• The next step is to relate your income to your expenses to see if it comes up negative or positive. If it comes out negative, adjust your budget by taking out the non-essential expenses until your expenses match your income. 
• The final step is to keep track of all of your expenses. This is how you keep an eye on your spending plan. 

What to Expect When You Start Budgeting 

One thing you can expect when you start budgeting is that you may suck at it, but that is how every skill always starts. With patience and a little practice, you will soon get the hang of it, usually in about 3 months. 

With more practice, you will become so good that you will forget you ever struggled with it. Now, you have the lifetime skill to make your money do your bidding instead of the other way around. 

Budgeting Tools 

One very potent way you can track your expenses so you can stay on track to achieve your financial goals is through the use of budgeting apps. There are different types of these apps to choose from. You can choose between premium or free ones. You can also track your expenses using a spreadsheet.

Conclusion

Budgeting allows you to create a road map for your finances, so you can monitor what comes in and what goes out. It puts you in a better position to handle your financial challenges. 

To help you stick with the habit of budgeting, make sure it aligns with a purpose that’s important to you. You should budget for a reason. Do you want to make budgeting a lifestyle or simply use it to save for retirement? Let your reason for budgeting drive your action.