What is a budget and how to create one

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what is a budget

Chances are you have probably spent way more money than you should and reach the end of the month wondering where did your money go. To avoid these uncomfortable moments, all you need is a budget. Here we’ll learn what a budget is, what it is for, and how you can create your own.

What is a budget?

First things first. A budget is simply a plan of how you will use your money to achieve a goal or make a purchase. Another way to look at it is as an amount of money that you plan to spend on an activity or during a specific period of time.

For instance, if you’re planning to take a trip for vacation, you should take into account the cost of transportation, hotel, and food, among others. Let’s say transportation will cost $50, the hotel will be at $200 for three days, and you’ll pay $100 for food. The final budget for your trip will be $350.

What is a budget for?

Now that we’re clear on what a budget is, you may be wondering how you can apply that in your daily life.

Well, budgeting your money will help you to know exactly how much money you earn, how much of it you spend, and what you use it for. As John Maxwell puts it, “a budget is telling your money where to go, instead of wondering where it went”.

An extra benefit of budgeting your money is that it is a great help to set and achieve your saving goals.

Continuing with our previous example, if you didn’t know the total amount of $350 you need for your trip, you wouldn’t know how much money you need to save for your vacation. 

Also, in case you don’t spend all of that money because the hotel had an offer or you were not as hungry as you expected, you’ll know exactly how much money you have left to use for something else or save for your next trip.

How to make a budget?

We get it… Now that you understand how important a budget is, you can’t wait to go create your own. But how to go on about that? Don’t worry, we’re here to help!

The truth is there is no one-size-fits-all solution for budgeting. The best budgeting method will always be any that works well for you and makes you feel comfortable using it. 

Here are some alternatives to get you started.

The 50-30-20 rule

One of the simplest ways to budget your money, and one of the most used, is the 50-30-20 rule. According to this strategy, you will be dividing your income into three categories:

  • 50% (half of your income) will be used for first-need expenses such as food, medicine, rent, and utilities.
  • 30% will be used for things you want to spend but are not essential. Think of that new pair of shoes, an upgrade for your phone, a dinner out with friends, etc.
  • The remaining 20% goes directly towards your savings and investment fund. 

The advantage of budgeting with the 50-30-20 rule is that you must put at least some of your money towards your savings, investments, and debt payments. This can help you keep better financial health for your future.

Let’s say you make $1,000 per month. Using this strategy, a sample budget may look like this:

Needs: Health, food, utilities500
Non-essentials: Streaming subscriptions and nights out300
Financial goals: Savings, investments, and debt payments200

The zero-based budget

The zero-based budgeting strategy is somewhat similar to the 50-30-20 rule. The difference is that you can tweak the amount you’ll need for each category according to your situation.

To make a zero-based budget, start by listing your monthly income: everything that represents an incoming flow of money. Then, list all the expenses for which you’ll be using your money: all the way from savings, needs, non-essentials, charity, investments, etc.

Finally, just subtract your income from your expenses to equal zero (that’s where the “zero-based” name comes from).

Let’s keep that $1,000 income of yours to look at an example.

Student debt payment200

Don’t worry if you don’t hit that zero-sum on your first attempt. In fact, that is a sweet spot to find yourself in. This means you have some money left to put to work towards your financial goals.

The takeaway

Ta-da! Now you know what a budget is and how important it is for your financial health. Go and make your own budget. Don’t worry if you find it difficult at first, it is all about practice.

While you’re on that, make sure to leave some room for your investments. Giving your money good use is one of the keys to improving your financial situation. Take a look at the FlexInvest app. It is one of the simplest and easiest ways to get started.

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