The Ultimate Beginner’s Guide to Budgeting and Saving

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My father always said, “If you relax when you are young, you’ll have to work hard when you’re old. Best is to work when you are young so that you can relax in old age.” From one generation to the other, we’ve told about the importance of saving money. It is the most basic and one of the most repeated financial bits of advice out there. While most of us understand its importance, many of us aren’t following the advice diligently.

Let’s face; money only gives us freedom. It provides us with the power to relax, think and think without hurry or any prejudice when we’re at our wit’s end. A right bank balance ensures we have enough to survive the storm and sleep soundly at night. While liquid savings give you the freedom of keeping cash for unexpected expenses, emergencies, a brokerage account can help you invest significant time in the future. Passions are hard to pursue with a dry store. 

Although, many people believe that, if you save 5-10 dollars at the end of the months, then what’s the point of saving! But starting somewhere is necessary, doesn’t matter how humble that beginning is, it still counts.

Your destiny is easier to confront when you’re in a comfortable position and don’t have to act immediately. Understood that money doesn’t solve everything, but it gives you an edge.

Know your income– Calculate your monthly salary after all the deductions. Your in-hand compensation determines how much you are left with at the end of the month. To spend money, you need to identify how much you actually have it. List monthly expenses- it’s a brilliant idea to make a list of all the monthly payments. 

  • Necessary monthly expenses- these are the ones you cannot possibly do without. For example:

a. Housing expenses like Rent/Mortgage, insurance, dues and repairs.

b. Essential Utilities like Water, gas (heat or cooking), electricity, and garbage pickup.

c. Transportation like a Car payment, car insurance, gas, and repairs.

d. Savings includes Emergency fund, vacation fund, and retirement funds

e. Services like: Babysitters, daycare, nanny.

f. A medical expense like insurance (health, life, vision, and dental), and other prescriptions.

g. Personal Debt like Student loans, credit card debt, or additional bank loans

h. Household expenditure like Groceries, toiletries, and certain unavoidable services like lawn mowing etc.

i. Cellular expenses like mobiles, home phone, and Internet

  • Extra expenses include lunch outs, after school treats, or extracurricular expenses. For example:

a. Entertainment includes Satellite, Cable, Internet upgrades, date nights, subscription services, streaming services

b. Wardrobe includes party dresses, replacement clothing, and matching shoes

Get real about it-

Adjust expenses to income- see if you’re living off the edge or making steady progress. If you’re living outside your means, it’s time to re-adjust your budget accordingly and cut expenses where unnecessary. Get rid of wants; keep your focus on the needs, if they’ve met satisfactorily then nothing best like it. If you possess some extra talent, try and make the most of it, by working extra hours to earn some extra bucks.

See what approach works best-

  • The 50/30/20 approach: It merely says that your needs have to be limited to 50% of your after-tax income. While your wants should be limited to 30%, the remaining 20% should be spent on savings and debt payments. For a novice, it’s a good and easy way to sort finances. A budget is never about just paying your bills on time, but it is also a way to determine how much you should be spending, and on what. This approach helps you in diversifying your financial profile; reach those savings goals and foster overall financial health.
  • The Envelope approach: before starting, it is essential to determine the Discretionary Income that you have available after paying your bills and putting money aside for savings and investments. Decide how much money you have left, and divide it amongst different budget categories, like groceries, entertainment, dining out, household items, clothing, gifts and allowances for fun etc. Henceforth, get few envelopes for each type and write the name of the expense on it. After getting the paycheck every month, you will put in the budgeted amount of cash. This spending cash-only approach will ensure you can keep an eye when the well’s drying up. Once you have no money left in the envelope, you have met your budget for the month, and now won’t be able to spend any more in this specific category until the next paycheck arrives. Now there’s any debt left at the end of the month, you can simply use the money left over from any of the envelopes to pay it off, but if there’s no debt left, the extra cash goes into the savings account.
  • Zero-based approach- it is one of the simplest forms of budgeting, where you plan about the money, even before it comes into your account. Every last penny is purposefully allocated, and you have a zero balance in the end. There are slots for every expense, and every dollar needs to be distributed to one of these slots. To simply put, it is adding up all your income, subtracting all your expenses, and allocating whatever is left over to categories such as savings, investments or whatever your needs are. Now zero doesn’t mean you have nothing left at the end of the budget; it merely means that whatever surplus money one has it has to be allocated to emergency funds or short-term savings. However, it is always a good idea to have dedicated slots for emergency expenses for those months when something unexpected happens. But if a deficit is noticed, it’s vital to revisit each category. To ensure that you’re not overspending with your means and after all the bills are paid, the money left has to go towards savings and beefing up the reserves.

Find an app- it can be as simple as a DIY approach or as professional as technological assistance. Finance software is the new fad! Basically, they’re apps that let you automate access and update your savings in a jiffy. However, technology isn’t everyone’s cup of tea; some are happy with the old school pen and paper approach. Some are just paranoid about linking their bank accounts to electronic services for obvious reasons, so it is perfectly okay to manage an expense diary in that case.

Automatic saving- a specific day of the month is chosen to transfer a set amount from your checking account to savingson a particular date or at a regular interval. It is specifically recommended for people with inconsistent income or those who access their pay frequently. In this saving type, the setup is initially arduous but after some time it’s easy peasy. A saving account comes pretty handily while saving for short- and long-term goals, such as an extended vacation in Paris or buying your dream house. Since it is all liquid funds, it is easily accessible at the time of emergencies.

Live humble, spend even more humbly- not everyone can draw a distinction between wants and needs! It is natural that most of us wouldn’t mind that designer handbag, fancy clothes and partying all weekend but paying bills and debts on time and investing money you have now so that your wealth can grow over time should be a priority. It doesn’t mean depriving yourself for the sake of saving a few extra dollars here and there but making a conscious choice about what’s more important. In the beginning, it might not seem that appealing but would mean more freedom to pursue your passions in the end.