Budgeting

By: John Oh

Source: Forbes

Budgeting. We’ve all heard the term from either our parents, peers, or teachers. It is one of the most important tools needed to be financially literate. Without budgeting, people would spend way more than they could afford with their income. We need to budget to have a set plan on how to use the money that we have in order to ensure that we will have enough to afford major and necessary expenses. Expenses can include mortgage, car payments, and insurance (if you’re the one paying these). Being unable to pay these expenses can lead to major issues. For example, if you don’t pay your mortgage for a certain amount of time, the lender can begin the foreclosure process which is essentially a lawsuit on the homeowner. If the homeowner cannot pay back the mortgage within a certain time frame that is assigned by the court, the ownership of the property goes back to the lender. Obviously, this would be quite unfortunate. Budgeting is a financial literacy tool that can be used to prevent such situations from occurring. To create a good budget, following the recommendation of credible financial institutions like Band of America is a great way to start, and that is what I based the following recommendations off of.

The first step of budgeting is to identify how much money you have to spend (income). This would be after accounting for taxes and any other work related expenses that take away from your net income (the money you actually bring home). This is extremely important because if you base your budget plan off of money you don’t have, you may think that you can afford that $50,000 dollar Rolex that you’ve been eyeing when you can’t even afford to buy a dollar store one.

Next, you want to find a way to track how you spend your money. This can easily be done on any type of online spreadsheet or an app on your phone. Either way, as long as you can easily record how you spend your money.

The third thing you have to do is set financial goals for yourself. If you don’t include this when making your budget, it is unlikely that you’ll achieve these goals. Maybe your goal is to pay off your student loan debt, save up for a vacation next year, or even retire early. Or maybe you want to have enough money to buy that super cool LEGO set you saw at the mall. Whatever your goal is, you should include it in your plan to make sure you can eventually achieve such goals.

Next, it’s time to actually make your budget. This is basically deciding how much of your money you are going to spend on each expense. While this may be a daunting task, Bank of America’s recommendation of the 50/30/20 plan is a great foundation to work off of. The 50 means that 50% of your income should go into your needs such as food, rent/mortgage, car payments, and utilities. Likewise, the 30 means that 30% of your income should go to your wants which could be shopping, streaming, or any purchase that is not completely necessary. Lastly, the 20 means that 20% of your income should be put into savings and paying off debt. This includes credit-card payments, your child’s education, and retirement.

Finally, you have to actually make changes in your spending to fit into the budget or simply, actually budgeting. Of course it’s going to be hard, but if you stick to your budget, you will ensure that you always have enough money for your needs, and an adequate amount for your wants as well.