Budgeting is an important skill necessary for teens/young adults to learn. Nowadays most individuals start working at a young age to try and save up for school and personal expenses, however, most of the time they’re careless with money. It can be difficult saving since being able to spend your own money is rewarding, so this does require a decent amount of self-control. Thankfully, there are ways to make this easier.
- Budget: A budget simply means the amount of money one has allocated to different funds and allows them to spend a certain amount at a time.
- Other important things to know when budgeting is your income, expenses for the month and have them categorized
Different ways to budget
- A big concept to keep in mind when thinking of budgeting are the Six R’s of Budgeting:
- Refuse: To avoid unnecessary spending
- Reduce: Trying to cut down on costs and ways to reduce expenses by a certain amount (everyone’s needs are different)
- Reuse: Try to make use of what you already have without additional spending. So try to avoid loans
- Reality: Involves seeing the realistic view on your anticipated financial environment, so looking at your revenue and expenditures, etc.
- Risk: The potential uncertainties that could affect your budget, such as unexpected/increased expenses, job loss, etc.
- Responsibility: The accountability one takes for their budget and actions taken to try and manage it effectively.
There are different versions of these acronyms, but they all have the same general concept of saving money. So, to apply these there are different types of budgeting someone can do. We’ll be focusing on four different types: Pay-yourself first, Zero based, Envelope system and 50/20/30.
Pay-Yourself First Budget:
- This method involves prioritizing your savings before other expenses. People often do this without realizing it so it’s an easy way to help stay on a regime of payments to different accounts.
- A common rule used is the 80/20 rule, basically you calculate all your essential expenses and non-essential expenses and subtract from your total income and what you have left over is what you use to pay yourself first.
Here’s an example of this:
- Imagine your total income a month is $5,000 before taxes
- Essential expenses cost $3,500 (this can include taxes, housing, utilities, loans, transportation, groceries, medical, etc.)
- Non-essential costs are $500
- So, if you add the two you’ll get your total expenses and subtract them from your income ($5,000).
- Once you get your result, which is $1,000, if you divide this number ($1,000) by your income ($5,000) it should be the 20%
Now keep in mind that everyone’s income and expenses are different. This example is just to help explain the method. Anyone can make their own budget plan such as 60/30, 75/25, or 50/30/20, and no one needs to follow the 80/20 rule and it could be unreasonable for some, it’s just a guideline. Just make sure that it fits your budget and you’re happy with the amount that you’re putting into your savings or spending that allows you flexibility.
Zero Based Budget:
- This method involves having someone allocate every dollar of income they earned to a specific category of expenses.
- This in turn causes one to use every cent of your monthly income, but keep in mind that the goal of this method is to prioritize saving
- For some this method may become overwhelming, but it helps keep track of short- and long-term expenses in a better management system
Here’s an example:
- As you can see there is $0 left over, this budget helps to keep people aware of how much money flows in and out of their accounts.
Remember that this method can be adjusted to anyone’s budget, it doesn’t need to be so strict, some categories can be combined or not included depending on the person’s preferences.
Keep in mind that this method has both very prominent pros and cons. It can help people control how much they’re spending and can prioritize saving. However, this method requires lots of attention to stay precise with categories, you can also have some issues with overdrawing due to unexpected expenses. This method can be seen as very hands-on. Overall, this method is not bad, but it’s not beginner friendly, everyone’s situation is different and it’s your choice on what budget to pick.
The Envelope System:
- The envelope system, also known as cash stuffing, is basically the same as the Zero-Based budget, but uses physical money instead or fake money (to represent money in your accounts without withdrawing)
- So, each envelope is labeled with a specific category. Such as, utilities, rent, groceries, etc.
- You’ll need know the same things as the other budgets, your income and cost of expenses. Also, DO NOT lose the envelopes or books
- This method isn’t hard to imagine as it’s pretty simple and has gained popularity because of that. To help make this easier instead of using envelopes, you can buy little budget journals that come with pockets to stuff with money.
50/30/20 Budget:
- This is a popular method for budgeting that breaks down your income into three broad categories after taxes
- Three categories: Necessities (50%), wants (30%) and savings (20%)
- To break this down, needs are expenses you can’t avoid. Wants are extras that aren’t essential to live and work. Savings is the money used to repay debt or create financial sustainability.
- This rule can be changed to fit your own financial preferences, such as 40/40/20 or 40/20/40