Budgeting 101: Everything You Need to Know to Start Budgeting
It's 2022, and after the chaotic years of 2020 and 2021, I'm sure a lot of you would like to regain some control over your lives, and the first place most of you would look to start is with your finances. This is when a budget comes into play.
Money management is a skill that every human on the planet needs to have since managing our money effectively allows us to manage our lives more effectively. This is because money is a necessary component of making things happen in our life.
If you're new to money management, you're probably asking what a budget is, so before we get into why you should have one in 2022, let me explain what it is.
What is a Budget?
A budget, according to Investopedia, is an estimation of?revenue?and?expenses?over a specified future period of time and is usually compiled and re-evaluated on a periodic basis. So, essentially, a budget is a plan you prepare for your money.?
Now, let’s get into why there exists a need for you to have a budget. There are various types of budgets which include, but are not limited, to the following;
For the purpose of this post, we would stick to the last three types.
1. The 50/30/20 Budget
The 50/30/20 budget is the kind of budget that is prepared where 50% of your? income earned is spent on needs, 30% on wants and finally 20% on savings. This is the type of budget I would personally recommend to a beginner to allow them to get the hang of budgeting and work their way up to better margins.
2. The Savings-First Budget
The saving-first budget is the type of budget that requires you to set some money aside before you begin allocating the rest of your funds to cover your expenses. This form of budgeting is really great for someone who needs to figure out which of his or her expenses are necessary. This budget is especially helpful in reaching savings goals. Therefore, if your goal this year is to save more, then I recommend this budget type for you.
3. The Spending-First Budget
The spending-first budget is the type of budget that requires you to pay off all your expenses first and then save what is left. This form of budgeting is the best for those whose expenses are significantly lower than their income. If you have a lot of expenses, I highly do not recommend this budget.?
I love to budget. I would say that my budget is a cross between the save-first and spend-first budgets because I treat my savings as an expense. Therefore it is always featured in my budget and I have seen how it has helped me immensely in meeting my savings goals for a period. You can also try that if it appeals to you.
Now that we have a little knowledge about budgets, let us delve into why they are one of the most important things to have when you want to take charge of your finances.
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What is the Importance of a Budget?
1. A budget gives you absolute control over your money
I stated earlier that if you want to take charge of your financial situation, the first step is gaining absolute control over your money. And, the only way to ensure that you have all the power when it comes to your money, is to have a budget for the income that is accrued to you.?Without a budget, you’re less likely to fully appreciate your financial situation and identify which aspects of it need to be worked on for your good.
2. A budget helps you to check your spending
One of the most important reasons for having a budget is to check how much of your income is spent on what. Without a budget, it is safe to say that the money that comes into your hands at the end of a period gets exhausted quickly leaving you unable to account for it. A budget will help you monitor your expenses and, where necessary, cut down the wasteful and noncrucial ones. This can be particularly useful if you find yourself often broke for seemingly no reason.
3. Budgets help you make informed financial decisions
The best decisions are made when you have as much information as you possibly can about something. So, the less information you have available to you, the less likely you are to make informed decisions. At any given point in time, your budget can provide you with any information you need to enable you to make certain decisions regarding your finances, as well as your lifestyle. Budgets keep records on how your money is spent and therefore, at any given moment, you can take out any expenses that are not adding any value to your life, which can inevitably help you channel your money to more productive uses.?
Now just imagine if you had no budget and did not have a detailed snapshot of your expenses vis-à-vis your income, it would be a lot harder to make changes to your spending patterns that would help you meet your financial goals and take charge of your life.
?4. A budget also helps you to plan for unforeseen situations
Life has a way of throwing curveballs at us and only your level of preparedness against those shocks or surprises can help minimize their impact on your life. One thing that can help reduce the effect of unforeseen events is having a budget. This means that should any unfortunate incident which requires you to disburse funds occur, you will be able to deal with it effectively, thanks to having a budget where you have allocated a certain quota of your income for such situations
5. Budgets help you save
Apart from helping you track your spending against your income, budgets also help you to save better than you previously did and start saving if you weren’t doing so before. You will also begin to save money that was previously used wastefully, as your bad spending habits are reformed and you build better-saving habits. And with time, you could even move beyond simply saving alone to investing as well in order to grow your wealth. But this all starts with having a budget first.
These are just a few of the benefits of having a budget. If one of your 2022 resolutions is to have better control of your money, then believe that you need to create a budget now. Your best shot at a good financial year starts with getting a budget.
Author:?Adwoa Baawa Acquah?for Bethniel Finance. Adwoa is an Accountant and the Creative Head and Founder at Baawa Unfiltered
Bethniel Finance is a mobile app that helps its users stay ahead financially by providing easy-to-understand content and financial tools to make financial decisions easier.