CFO of Life #123: Setting a budget - Step 2 to mastering your money

Look, I was one of those people who didn't like budgeting, but then I went to university and… I just had to.

I was also one of those who didn't believe there was any use of a budget.?

It didn't make me money, it didn't save me time, it didn't bring me joy. It took time away from me as it made me do a lot of calculations to figure things out. It also made me depressed as I found out how poor I was and how little I had to my name.

After some time, budgeting became a habit as I managed to balance my books and get the hang of my spending. Then, with practice and patience, it became a hobby and is now part of my monthly routine and something I look forward to.

But after time, I also found the one budgeting approach that makes life easy: everyone can use it. It is so simple, straightforward and well-built that some people might see it as a guide rather than a rule.

That’s precisely what I will show you this week: my favourite quick and simple budget that anyone can execute!

And to ensure you get everything you need from the topic, I will cover the following 5 points:

1. What is a budget?

2. Why do I need a budget?

3. What types of budgets exist?

4. Who is budgeting for?

5. 50/30/20 - the magical budget that anyone can use!

If this is your first time reading this blog, my name is Simeon Ivanov (Si-Me-On). I write this weekly blog about personal finance called CFO of Life to bring you on the journey towards becoming the CFO of your Life! I hope you like it and stick around for the long term!

Let’s get into the thick of it!

A budget is a plan for using your income over a set time (week, month, quarter or year) to reach your savings and spending goals. It helps you track where your money is coming from and where it's going so you can make informed decisions about your spending and savings.

It’s simple, straightforward and easy to understand.

It does not have to be completed, it doesn't have to be a 3-hour process that requires the help of 3 accountants and 2 analysts.?

It has to be easy to do every week, month, quarter or year.

Every company has a budget to ensure enough money for everything they want to do.?

And to answer your question the way I do with everyone who asks it in real life, you need a budget for those three reasons:

Reason 1. It keeps you accountable?

Having a budget is like having an accountability partner, it keeps you honest about your spending and goals. And as the budget has no sympathy or liking for you, it wouldn't mind telling you that you went overboard and spent too much, and on the other hand, it will always show you how well you have been doing.

Reason 2. It is a reality check

A budget is a great reality check, showing how much money you spend and where and if it aligns with your goals.

Reason 3. It is a pulse check on all things money

A budget will keep you honest, but it will show how your money is doing, where you have spent too much and how that worked out.

It will highlight where and how much you have spent without having a bias and without sparing your feelings.?

You will see all things money, including all results, wins and losses.

Budgeting is for everyone and anyone!

It is for those people who need some help with managing their money. If you have your money in the right place, you probably do some budgeting.?

But if your goal is to master your money and get it in a better state, budgeting will make a massive difference in your life.

It will help you keep your finances in mind, it will teach you about your habits, it will bring up unwanted expenses, it will show you where and how you are overspending, but it will also show you what money goals you have achieved so you can celebrate your wins and turn your losses to opportunities!

There are many different types of budgets, but they all serve the same purpose - to help you manage your money.

But every budget has a unique way of helping you achieve that.

Some budgets are bound by a timeframe, such as weekly, monthly, annual or project budgets. Those focus on a specific timeframe so you can closely monitor all incomings and outgoings for that period and compare them to your plan.

Another way to create your budget is to choose the?flexibility?you need. You can have a fixed/static budget that considers all your inputs and disregards any changes. Or you can have a flexible budget that considers your income for a specific period of time and helps you adjust your plans accordingly.

Last but not least, you can vary the amount you use from your budget. You can have a zero-based budget that considers every penny you make. Or you can have an open budget which only focuses on the amount you make for the period and how much you spend at that time, assuming that anything left at the end of the month will be saved.

In general, those are the three significant variables for a budget; hence, the one budget I will focus on covers all three.

Now, you might have heard of it, but the 50/30/20 budget is the simplest, most straightforward and most effortless to understand and use budget that anyone can use.

It simply goes like this:

Spend 50% of your salary on your needs/must-haves, 30% on your good-to-haves and 20% on your should-haves.

Where your must-haves are the most essential things in life, like rent, food, transportation, insurance and personal care, those are the absolute bare minimum things to have in life.

Your good to haves are entertainment, fun, travel or, in general, anything that will help you culturally enrich yourself.

And your should-haves are things that help you futureproof yourself. Here, you can put your savings, investment, debt repayment or educational budget, as all of these help you improve your future in one way or another.

Those are the three categories you need to use to cover anything and everything in life. In fact, I wrote this article (link).

Now, back to the 50/30/20 budget!

Compared to other budget strategies it is relatively easy to set up and follow as it only has 3 categories that account for everything you make. So there are no complications that can come if your income changes in either direction.

At the same time, it is entirely flexible and allows you to use it every day, every month and every year. As the boundaries stay the same, they keep you in check. They also show what and how much you are overspending without you having to do a lot of fancy maths.

The genuinely genius part is that the 50/30/20? budget is just enough to show you that you are responsible and just enough to allow you to have money for entertainment.

But most interestingly, this ratio works with any salary. Regardless of whether you make $500 a month or $30,000, you can use this ratio to budget it, and it would give you a pretty good view of your money.

Now, the caveat is that once you start making more and more money, you should start shifting which category gets how much % of your income.

If you make $500 a month, it is understandable that rent is your most significant expense and that 50% of your spending is towards your needs. But if you make $30,000, I expect that, in most cases, 20% would be sufficient to cover all your needs.

That is the beauty of this budget; it makes changing everything super easy. It adapts to your life and enables you to save time while budgeting and spend more time living.

I mean it, budgeting helped me get out of the slump in university when I was not making a lot of money but I had to manage it religiously. It made me believe that managing your money is something we all have to learn.??

And I hope that this week's article has sparked your interest to at least start budgeting or give it a second try. It’s one of those things that take time to get used to but will pay off with great dividends!?

And if you start budgeting, let me know, and I will always be happy to help you get through any problems that you might come up!

Next week, we’ll continue on the journey of understanding money and how we spend it, but this time, from the lens of the different ways that life surprises us. We would look at how to try and predict life and balance the predictable and the unpredictable!

Post #123 in the series CFO of Life #si #personalfinance #CFOofLife