Budgeting

I covered details about High Yield Savings Accounts last time. I wrote about different savings account and their uses. What was missing from that topic was a look at our budget. We should save for a rainy day, but some of us do not have a plan in place to achieve our savings goals. What we will be looking at for this topic are different ways to go about budgeting.

Budgeting

A budget is a financial plan set for a defined period. It is very useful for understanding personal finance as well as cash flow. A personal budget would be money allocated into spending categories to accomplish a goal. These categories are assets, liabilities, expenses, and income. Budgeting comes from a plan on how your income is dispersed among your assets, liabilities, and expenses. At the end of your calculations, you should be left with what you have to use or save for yourself.

A lot of us are interested in economics to some degree. We work to pay bills, invest, and reach a secure spot where we can operate with fewer worries. Budgeting would be great to organize your financial life to achieve your pursuit of happiness. Life is not easy for many. The majority of us have to grind day in and day out just to keep our heads above water. Setting a budget would be beneficial for boosting the success of your financial future. It can help with building an emergency fund, investing in a passive income source, or putting you on a positive trajectory for net worth.

What is Net worth?

Net worth is the valuation of your assets versus your liabilities. It is the sum of what you have minus what you owe. This can be calculated as followed:

N = a - l

The "N" stands for your total net worth in this equation. The "a" stands for assets or your total assets. The "l" is for your liabilities or your total liabilities. Net worth is something to think about when you are budgeting if you want to evaluate where you are at this time. You can also apply the same formula for budgeting. Look at what your spending and what your saving to calculate the remaining balance of what you have to work with towards your goals. You can also lookup plans to start budgeting. Here are a few plans that you may be interested in seeking.

50/30/20

The 50/30/20 rule is a traditional way to budget. It doesn't involve detailed brackets or an excel spreadsheet to set this plan in motion. Rather, you would budget your income stream into the following.

• 50% of your income goes towards your necessary expenses.
• 30% of your income goes to your nonessential expenses.
• 20% of your goes toward your financial priorities.

The 50% in 50/30/20 would be your expenses, your bills, your rent, your mortgage, your food, and pretty much anything necessary for your living conditions. This does not count for your subscription service. Just your actual necessities you need to survive. You'll live if you don't see the newest season of "Wandavision". You want to factor in all your needs within your income bracket to use for survival.

The 30% in 50/30/20 would cover your nonessential. Gaming, subscription service, visiting a diner, and anything else you can think of that you don't need to live but would love to have. Though you will live if you don't see the newest season of "The Animaniacs" you may enjoy watching this. Factor in your wants after looking at your needs and adjust accordingly.

The 20% in 50/30/20 is where you would build on your financial freedom. Rather it is debt or building your emergency fund, 20% is important in getting you closer to your financial goals. So if it's saving your money for a rainy day or paying off the debt that has been bothering you. Make sure that your 30% doesn't bleed into your 20%. If this is the case, re-evaluate your wants and factor in your 20% before you factor in your wants.

You have to be consistent to stick with your budgeting plan, but I do have a modified version of the 50/30/20.

My old 50/30/20 has the 50% for both expenses and wants 30% for savings and 20% for investing. The reason I have this modification is so I can build my emergency fund while I invest. Now the hard part about this plan is the 50%. You are not going to be able to go out as much as you want to. The idea behind this was that you will be staying in a lot more but you will be able to build on your financial freedom faster.

My new 50/30/20 has the 50% all focused on the necessary expenses. That includes minimum payments for debts. My 30% is still for savings, but I have also included investing and focused debt payoff in this category. My 20% is now focused on my nonessentials. The idea behind this plan is that I always have my necessary expenses covered while I am building on my financial plan and decrease my debt.

Zero-Sum Budgeting

Zero-sum budgeting is a way to put every dollar that you receive to work. What you're doing is making your dollar work for you in an attempt to build on your income. The idea behind this is that you would finish your month at a $0 balance. In this plan, you would bracket off certain expenses to have everything planned out in advance. A lot of businesses use this to maximize their profits. You can use this to maximize paying off your debt or to work on building your finances. It will be hard to do, but you have to look at your spending as a whole realistically and evaluate what stays and what leaves.

60/40

The 60/40 rule for budgeting is as followed.

• 60% of your income goes toward your necessary expenses.
• 40% of your income goes toward your nonessential expenses.

The 60/40 rule for budgeting is another modification of the 50/30/20 rule. It's a two bucket view of the former rule where the 50% and the 20% are modified to 60%, and the 30% is modified to 40% for wants and needs.

There has been an additional modification to this rule such as 80/20 and 70/30 depending on your tolerance to money. The 60/40 would be more ideal for someone who is just starting on their budgeting plan because it takes less time for you to adjust to it.

The Babylon Method.

The Babylon Method to budgeting is pretty simple. You save 10% of what you earn and use the 90% for both necessary and nonessential purchases of services and goods. The Babylon method comes from the book, "The Richest Man In Babylon" by George Clason. This book covers 7 simple rules of money. The method comes from the 1st law in the book which is "Start thy purse to fattening". Each law has a story involved with them to give an example of how to proceed on building wealth. Though I would recommend it for middle school or high school students as required reading. It can be a tough read for some because it is written in Old English. A modern version of this book, in my opinion, would be Dave Ramsey's "The Total Money Makeover".

Conclusion

These are the choices you have starting your budgeting. There are more methods of budgeting that you can look into. Budgeting starts with a hard look at your actions and how to overcome them. At best your liabilities and expenses are small and manageable to keep the focus on building a successful financial future. At the bare minimum, you would have to make a sacrifice on certain events to pay off what you owe. It will take time, but with consistency, you will see the results you desire.

Disclaimer

I am a finance enthusiast. Not to be confused with a finance professional. I love everything about finance, but I could not in good conscience give you information claiming it to be an expert's opinion. I highly recommend doing your research and talking to a professional to get the best results for your journey.

I hope this was helpful.