Unleash Your Superpower! Budgeting 101

Welcome back to “Unleash Your Superpower,” the personal finance series that’s all about helping you take control of your financial life! It’s finally time to dive into the nitty-gritty of budgeting. In this article, we’ll explore how to approach budgeting and some ways to do it, their pros and cons, and how to figure out the best one for you.

Why budgeting?

In simple words, budgeting is one of the building blocks of personal finance. It’s important for you to figure out or at least get an idea of how much of your money you spend in different categories. A budget helps you do that really well. If you’re starting out, the best way is to just go with vague figures and keep refining them month after month. This way you can actually stick to your budget and keep yourself away from setting ideal scenarios that seldom get followed. So the point of budgeting shouldn’t be to force yourself but to feel in control of where your hard-earned money is going.

Oh by the way, here’s today’s quote

Too many people spend money they haven’t earned, to buy things they don’t want, to impress people they don’t like.

- Will Rogers

Isn’t that a powerful statement? I bet many of us, including myself, can relate to it. One of the great things about budgeting is that it makes you take a step back and think whether you can actually afford those fancy, shiny things right now. Remember, even if you have the money, you might not be able to afford them because you have different priorities. And Mr. Rogers also subtly hints at the trap of using debt to finance purchases that aren’t assets — but we’ll delve deeper into that topic later on.

Different Budgeting Methods

Alright! Now we’ll be talking about something actionable that you can start incorporating into your financial planning right away. I’m going to share some of the most effective budgeting methods I’ve come across, but don’t hesitate to do some more research on this topic if you’re curious. Let’s get started!

The 50/30/20 Rule

This one is pretty straightforward, allocate:

1. 50% of your income to necessities (like housing and groceries)
2. 30% to wants (like dining out, hobbies, and entertainment),
3. 20% to savings/debt repayment.

Pros: Really easy to implement and follow. Provides a good balance between spending and saving.

Cons: Not very suitable for people with high debt and doesn’t account for individual financial goals.

Zero-Based Budget

A zero-based budget requires you to assign all of your monthly cash flow to a specific expense, savings, or debt repayment category so that your total income minus total expenses becomes zero.

Pros: Ensures that every rupee has a purpose, and helps identify and eliminate unnecessary expenses by allocating everything beforehand.

Cons: Can be time-consuming and requires frequent adjustments.

The Sub-Savings Accounts Method

With this method, you create separate accounts for each of your financial goals, such as vacations, a new car, or a down payment for a home. You allocate a portion of your income to each account every month. An extension of this could be investing that money somewhere and treating that investment as an account.

Pros: Helps you save for specific goals, and makes it easy to see your progress towards each goal.

Cons: Requires multiple accounts and careful management.

Envelope System

It works by dividing your cash into physical or digital envelopes for each spending category. Once you’ve spent the allocated amount for a category, you’re done for the month.

Pros: Helps control overspending and makes you mindful of your spending habits.

Cons: Can be pretty time-consuming to manage. Also, doesn’t work well for those who primarily use credit cards or digital transactions.

Conclusion

And there you have it! Those are some of the most popular ways to set up your budget. I’d also like to give a little insight into my personal approach to budgeting. My go-to is a combination of the zero-based budget and the sub-savings account method; I try to plan out how I’m going to spend and invest all of my income and then divide it into separate accounts/investments depending on my goals.

One very important thing to remember is that there’s no one-size-fits-all approach to budgeting. It’s essential to find a method that works best for you and your financial goals. Don’t be afraid to experiment and tweak your chosen method to fit your unique situation! As always, stay tuned for the next article, and make sure you subscribe and follow so you don’t miss any upcoming articles. Thank you!