Yeah, I know what you must be thinking – what is this! Who the hell hasn’t heard this word yet! It means to cut my expenses so that I can get rich in old age! What crap! I know, but there is much more than that; and in anyways, what we think is crap may not be that much bad in the first place if we take a closer look at it don’t we? And not to worry, there are many ways to get rich at old age, but this blog will not be upon any one them. In this blog, we will explore the concept of ‘budgeting’ and various super easy rules that can help you to create an effective budget (trust me, you don’t have to get your Netflix subscription – that too when the latest season oof Black Mirror is out!). We’ll discuss the importance of budgeting, how it can lead to financial freedom at an early age, and provide strategies to master the art of a long lost skill of the millennials – budgeting.

A calculator spelling out 'budgeting' with all the elements of savings, investments and types of budgeting encircling around it.

What is Budgeting?

When it comes to financial literacy, budgeting plays a crucial skill for achieving financial stability and freedom. It empowers us not only to take control of our finances and prioritize our expenses, but also helps us in a faster growth towards our financial goals. Budgeting is the process of creating a financial plan to allocate one’s income wisely; and it step by step processes like analyzing your income, expenses, and then setting up such financial goals to ensure that your money is being utilized efficiently. Here’s why budgeting is important:

(a) Financial Awareness

First and foremost, even a fresher with his first six month’s in a salaried job knows that budgeting helps us gain a clear understanding of our income and expenses, enabling us to make informed financial decisions.

(b) Goal Prioritization

By setting financial goals and allocating funds accordingly, budgeting ensures that we, as big dreamers (Remembering Lennon’s Imagine here), are actively working towards achieving those goals.

(c) Debt Management

Now now, have you been losing all your youthful hairs in the tension of your rapidly rising credit card dues ?Well, you have a start! Budgeting helps us tackle debt by allocating funds for debt repayment and preventing further debt accumulation, thereby getting into a debt snowball.

The Elixir of Budgeting – 50-30-20 Rule

As per an article of the Investopedia,

‘U.S. Sen. Elizabeth Warren popularized the 50/20/30 budget rule in her book, All Your Worth: The Ultimate Lifetime Money Plan. The rule is to split your after-tax income into three categories of spending: 50% on needs, 30% on wants, and 20% on savings.’

The Investopedia

Naturally, this rule seems pretty simple! But is it? Lets find out in details!

Suppose you have an post-tax income of $2000/- month. 50% of that, that is , $1000 will go towards your rent, utilities, foods, bills and all those things which you classify as ‘Needs’ – that is , you can’t live without it! Oh, and the extra beer party is not included in ‘Needs’, so cut that out ! (I pray to god you’re not an alcoholic, but do please keep reading on!)

Next come wants – you guessed it right, the late-night parties, the outside food, the entertainment values, and of course, the latest OTT subscription all constitutes your ‘Wants’ – but beware – these expenses cumulatively shouldn’t cross the threshold of $300/month – that’s right – up to 30%.

Now this is the part which will actually reap you benefits in the next 10-12 years – SAVINGS – every month, the rest $200 of your income must and MUST go towards your savings – it can be stocks, bonds mutual funds, but make sure to set this amount apart every month at the day of very salary so that you don’t be an indiscipline fool! Remember, the price to pay to spent away this meagre amount is a life filled with misery! Think about it!

With gradual increase in income and your savings pool, its advisable to keep increasing the quota on your savings and decreasing your expenditure on wants so as to attain F.I.R.E very early in life, but the absolute mandatory is the 20%. The pain of savings is much less than the pain of being a poor guy all through his life – again, think about this!

a purse with excess of coins telling us that how by effectively budgeting, we can have much financial abundance in the future.

The Second Pillar of Budgeting – 80/20 Rule

You might have guesses this right (you should), because this is just a modification in the the above-mentioned 80-20 rule with just a small tweak – here dedicate 80% of your income towards essential expenses and savings (Needs + Savings), while the remaining 20% can be allocated for discretionary spending (Wants). Check out this great article by Christy about this amazing 80/20 Rule.

The Third Pillar – Zero-Based Budgeting (ZBB)

In one smart line – Assign every dollar of your income a specific purpose, ensuring that your income minus expenses equals zero. This approach helps track every expense and maximize savings. Investopedia has a great article on this so check it out here.

The Fourth Pillar – Pay Yourself First

The name gives it all away – doesn’t it? Well, it’s as simple as it sounds – Prioritize savings by setting aside a portion of your income (a minimum of 10% to a maximum of 50%) before allocating funds to expenses. Then, when its done, automate regular transfers to savings or investment accounts so as to increase the savings pool slowly and steadily to give you the wings of freedom one day. Still have more queries – check this entire amazing article here.

Financial Freedom – A Myth?

It may seem like that for many of us, but it’s not that! In fact, effective budgeting helps in this journey in many other ways like :-

(a) Goal Setting

Define clear financial goals, such as building an emergency fund, clearing debts, saving for various other expenses like higher education or retirement (if required), and outline specific milestones to track your progress.

(b) Tracking Expenses

Another huge part of budgeting, it stays pretty simple and straightforward- monitor and categorize your expenses, identifying areas where you can reduce costs and optimize your budget smartly so that you don’t look like a fool to the mirror at the end of the month! Simple, isn’t it!

(c) Minimizing Debt

A masterstroke in the journey of effective budgeting and being financially free – Prioritize paying off high-interest debts, such as credit card dues or personal loans first and then to free up funds for savings and investments.

(d) Investing Wisely

We should educate ourselves on investment avenues suitable as well as compatible for our risk tolerance and goals. For Indians, consider options like mutual funds, fixed deposits, Public Provident Fund (PPF), or National Pension Scheme (NPS) to grow your wealth. For Americans, consider checking out this article for detailed information on investment choices and options.

a chart where the amount of money goes up every year stating how we should effectively budget and as a result, increase our savings and emergency fund every year.

(e) Emergency Fund

Another gun in your armory of financial independence – a sniper rifle itself! It is pretty straight you know – build an emergency fund that covers six to twelve months of living expenses to ensure financial security during unexpected events. Six to twelve months, remember that!

(f) Controlling Lifestyle Inflation

And the most destructive is kept for the last choice – don’t tamper your own destiny with your very own hands. As your income increases, avoid succumbing to excessive lifestyle inflation. In exchange for that, allocate the highest percentage of your additional income (if not all, though it will be the best) towards savings and investments instead.

(g) Adequate Insurance Cover

An effective and adequate coverage for health, motor, home and life will ensure a longer and much more stable road towards financial freedom using budgeting as its primary tool. What kind of insurance do you want? Check here more detailed choices on insurance, and the most necessary of them all – health insurance.

Effective Budgeting Strategies : How Can We Do It Easily?

The art of budgeting requires an unnerving spirit to do to over and over and over again every single month of every single year and keep on doing it until we taste the sweet essence of financial abundance. But we are not all alone ; there are various effective strategies that once known, can help us for long in this journey of abundance. Some of them are –

(a) Set Realistic Expectations

Be realistic about your income and expenses and at all costs, avoid overestimating your earnings or underestimating your financial obligations.

(b) Trim Discretionary Expenses

Properly Analyze your discretionary spending and find ways to cut back without sacrificing your happiness. Look for cost-effective alternatives or negotiate better deals.

(c) Take Help of Technology

Super read and available budgeting apps like Mint and YNab can make smart decisions for us and we can take ready help from them in our journey of financial abundance. Want to know more about the latest budgeting apps and check out your options ? Click here.

(d) Establish an Emergency Fund

Well ,this ’emergency fund’ thing comes back again and again and don’t we all just hate it ? Well, whether we like it or not, it’s the most crucial thinkg that is going to make a significant difference in your financial stability – Build an emergency fund that covers three to six months of living expenses. This ensures you have a safety net for unexpected financial challenges.

(e) Automate Bill Payments

Set up automatic bill payments to avoid late fees or missed payments. This simplifies your financial management and ensures your bills are paid on time. Also, automate your savings in this way and you can go a long way in the journey of being rich with the help of SIP’s only.

(f) Seek Professional Advice

Well , this last advice is not viable for all of us out here, but only when you see you are making a handsome income but your net worth is not going up, that’s when you need to take this step in concern to your best future version of you – Consult with a financial advisor or planner to gain personalized guidance and recommendations tailored to your specific financial situation.

a circle where all the elements of money are encircling a big piggy bank named budgeting, thus giving us an effective consideration of how important budgeting is to our daily lives.

Summary

Getting to be actually rich rather than like looking one, pretending one and just wishing to be one is much harder and tougher than we read about it. It requires three most essential aspects of life that is the success mantra for any field – focus, discipline and consistency. Just wishing to own that grand gorgeous house of your dreams one day and actually buying it ten years later – these two things are entirely different from one another . The first involves just wishing like a daydream, the second, many crucial strategies such as budgeting, investing and then getting to learn more and more as we continue our journey to the path of financial abundance. So keep this weapon in your close – because budgeting is a powerful tool that can lead you towards financial freedom. By understanding the concept of budgeting and utilizing different budgeting rules, such as the 50-30-20 rule and other effective strategies, you can take control of your finances and work towards your financial goals. Remember to track your expenses, prioritize savings and debt repayment, and regularly review and adjust your budget as needed. With disciplined budgeting, you can pave the way to financial freedom at an early age, giving you the opportunity to live life on your own terms. Let’s all start budgeting our money today and together embark on our journey towards a brighter and better path of redemption – the path known as a financial free future.

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6 Comments

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