Budgeting 101

The goal of Personal Finance Pathways is to help all readers reach their own financial goals and dreams. A key topic in personal finance is budgeting and money management. It is important to establish what exactly budgeting is and why it is a vital skill to learn and perfect in our daily lives. The simplest and most effective definition of budgeting I could find comes from Merriam-Webster dictionary. Budgeting is "a plan for the coordination of resources and expenditures." This definition perfectly sums up the basic gist of this blog post. We will be discussing how to plan the use of our resources in order to be prepared for anything life throws at us.

Now that we have established what exactly budgeting is, let's dive into what our resources are, how to divide our budget by expenses and how to plan accordingly. In order to budget properly, you first have to understand the amount of resources you own. Knowing your net income will decide the base of our budget and how much we can afford to spend. Next, it is important to identify all monthly expenses. Expenses should be categorized between fixed expenses and variable expenses. Fixed expenses are expenses that are always the same price no matter the change in activity. Examples of fixed expenses may be your rent, insurance, car payments, taxes and utility bills. Variable expenses is the opposite of fixed expenses. Variable expenses are expenses that do change over time or with a change in activity. Examples of Variable expenses are gas, groceries, dining at a restaurant and shopping for clothes. When you have finally identified wether an expense if fixed or variable, find out what the monthly expense cost will be.

A great strategy to use when planning a budget is the 50/20/30 rule. This rule divides your budget into three categories. The first category is 50% of your budget which will be allocated to fixed expenses. This is the most important part of your budget which is why it should take up 50% of your income. Fixed expenses are your needs in life and as stated earlier, fixed expenses may be rent, insurance, taxes, and utilities. Next, 20% of your budget will be allocated to savings and financial goals. This 20% may be the hardest category to stay disciplined when saving, but it will pay dividends in the long run. This category is important because it is smart to always have income saved in case of an emergency or unexpected expenses that are not accounted for. Furthermore, this category may be used to invest in yourself. Aside from an emergency fund, this income may be used to contribute to retirements funds such as a 401K or Roth IRA. It may also be used for investments or future purchases that will contribute in the long run, such as property. The final 30% is your wants in life. This is the category that we all love because it is responsible for paying for entertainment, shopping, subscriptions, and personal care.