What is budgeting? 

Budgeting is the art of planning for the allocation and usage of funds. It could be long-term, short-term, or a blend of both, depending on the set strategy.

 This can be done by simple methods such as brainstorming and jotting down key areas to spend on and how much to allocate. You can digitize this process by using modern tools and applications such as AI assistants to aid in financial planning.

Importance of financial budgeting for beginners

Budgeting matters because it gives one a sense of control over their finances, and it generally gives an outline of how to allocate financial resources wisely. It also helps to:

• Prevent overspending.

• Accommodate for all factors that may need finances, i.e., emergency, medical, or school tuition.

• Helps to manage and eliminate debt without hustle.

• Allows for easy and consistent saving.

• Spares you the financial stress of worrying about money disappearing mysteriously.

Budgeting tips and steps 

1. Understand your income

Begin by identifying your net worth. Map out all your monthly incomes and have a cumulative figure in mind. Account for tax, transactional fees, or any debts of the currency being offset.

 Once you have the final figure in mind, list all your expenses. You can divide them into categories such as fixed (rent, utilities) or variable (shopping, trips). Leave room for unforeseen expenses/emergencies.

2. Set appropriate and realistic goals

The next step is to give your budget a clear purpose and path. Set smart goals. You can divide your goals into immediate, short, medium, and long-term in order of priority or need. Sometimes, goals can build into one another.

 For example, an immediate goal would be setting aside money for roofing materials, which, in the long term, will be used to build a house. Once the money for roofing material is done, you embark on another short-term goal of saving money for stones and sand, all while separate, leading to one long-term goal. Learn more about setting money aside for various activities and emergencies here.

 This step of understanding your goals allows you to rationalize allocation of funds in order of priority.

3. Choose a simple method that works for you

There are various methods of doing so, but some of the most popular and best budgeting methods include

•  50/30/20 rule, which proposes allocating 50% of your after-tax income to needs, 30% to wants, and 20% to savings and debt repayment. It is simple and effective once you have sorted your expenses.

• Zero-based budgeting is another method where every expense in a budget needs to be justified from scratch, as if starting from zero, for each new budget cycle. It needs more detail and can work best for people with lots of list items on expenditure or for impulse spenders. It instills discipline and provides room to adjust expenditure and finance allocation depending on changing needs.

• Envelope system budgeting, where money is physically allocated in various envelopes for specific expenditures/purposes. This is a great way for people who are disciplined with money or do not have a lot of finances and list items to sort through.

4. Eliminate unnecessary expenditure

Cutting expenses that are nonessential is the next key thing in budgeting. While you should strive for a balanced expenditure reflected in your life, some are not important or necessary.

 While budgeting, identify such expenditures. For instance, there may be a double service provision, such as subscriptions for Netflix and Hulu. In this instance, canceling one is deemed logical, as one provider is still adequate.

 This clears funds to be diverted into other areas of financial planning.

5. Track expenditure

Going back to check for progress allows one to determine whether they are on the right path and where to make changes. Track expenses regularly to see if goals were met, if funds were distributed accordingly, and where overestimation or underestimation occurred.

 This practice also spots mistakes early for correction. Applications such as spreadsheets or Monarch and EveryDollar work well.

 This can be through a monthly budget review or a quarterly review, whatever works best for an individual.

6. Financial Automation

If banking in a modern way, then there is an option for automation, that is, automatic bill payments and/or savings. Your accounts can also be interlinked for ease of transfer of funds.

 This allows for consistent savings, bill payments, loan repayments, and investment portfolios without too much work of visiting the financial institution all the time.