Even hearing the word “budgeting” can strike dread into the hearts of some young people. This need not be the case. A budget is simply an estimate of money coming in (your income) and money going out (your expenses) over a given period of time. Though the concept is simple, the rewards of budgeting are many. Successfully maintaining a budget is key to achieving all kinds of financial goals, like saving for a large purchase, being able to handle an emergency expense, or putting money toward whatever it is you’re passionate about.
Although 80 percent of Americans report having a budget, 65 percent also express having no idea how much money they are really spending at a given time. Even those who believe they are money-savvy might not realize the inconspicuous spending they are often doing, such as the costs imposed by utility bills, gas, car repairs, etc. It’s crucial to be comprehensive in accounting for all spending habits, from major expenses, like rent and tuition payments, to the little things, like the occasional coffee or Uber ride. Monthly subscriptions (like to Netflix, Hulu, Amazon Prime, etc.) can add up and are easy to forget about. An extensive budget that includes all of your spendings — not just the obvious charges — will provide a fuller financial picture and make budgeting easier.
How to structure your budget
It’s never too early to start budgeting. To get started, total all your expenses from the previous month(s) as a baseline for predicting spending patterns in the upcoming months. There are plenty of resources available, like worksheets and apps, that make budgeting easier – we offer a free tool here. Once all your expenses have been categorized and totaled, consider your monthly income and how much you would like to allocate toward savings each month.
There are many ways to structure your budget. I recommend the 50/30/20 budget rule: Spend 50 percent of your monthly income on needs, 30 percent on wants, and save the remaining 20 percent. What’s great about this budget is that it doesn’t require you to give up the “wants” that you love most! You can create a budget that’s consistent with your long-term goals without compromising on your favorite purchases. For example, if you know you are a foodie, you can plan ahead and budget enough money in your “Food/Dining out” category to explore all of your favorite restaurants as long as you’re willing to cut back on spending in other categories if necessary. The key to a successful budget is knowing yourself and being realistic about the lifestyle you’d like to have.
The power of budgets
An adequate budget with proper money allocation can help you cut out wasteful spending, meet your short- and long-term financial goals, and save for a rainy day. Even if you don’t have many long-term financial goals now, you might want to settle down and buy a house or have a kid further down the line. Saving now allows more flexibility later. And even if you never want to buy a house or have children, don’t underestimate the importance of having emergency funds. The COVID-19 pandemic is a perfect example of why having adequate savings is crucial: Layoffs and medical emergencies can strike without warning. Setting money aside before you need it will help you stay afloat in more uncertain times, especially if you’re able to save the recommended six months of income.
With the right tools and strategies, budgeting can put you on the path towards financial freedom. Ultimately, living simply and within your means now will provide greater opportunity later down the line. As Mark Cuban puts it, “It doesn’t matter where you live. It doesn’t matter how you live. It doesn’t matter what car you drive. It doesn’t matter what kind of clothes you wear. The cheaper you can live, the greater your options.” Finding the balance between enjoying your hard-earned money and saving for the future is crucial to a firm budget and a stable financial future.