A budget is a plan that helps you decide how to spend your money each month. It will help by giving you clarity and direction to make better financial decisions. By following a budget, you’ll be able to see how much income you bring in each month and how you can spend it. So, a budget is the information guide that will help you decide how to achieve your financial goals. And if you don’t make enough money, you will see that clearly in your budget, and you can choose to find a high-paying job or pick a part-time job to supplement your income. It will also help you see if you can or cannot afford stuff when buying. I suggest you follow a simple budget that lists all your expenses against your income, and there you will have all the information you need to make sensible decisions about your finances.

Why is a budget important?

Budgeting is essential to every financial decision we make, whether planning to take a family vacation, buying a new car, or purchasing a home. You need to have a financial plan that will quickly help you achieve your financial goals.

I have yet to read a book about a successful person who built wealth without knowing how to manage their finances or a company that could stay profitable without engineering a sensible financial strategy. You must do your due diligence, follow a budget, effectively manage your finances, and build generational wealth for your family. A budget is just a tool that can guide you to achieve your financial goals if appropriately implemented.

The budget will help you:

• To prioritize how to spend your money.
• To downsize or eliminate less essential expenses.
• To focus on your financial goals.
• To get out of debt.
• To create a framework to avoid conflict about money with family.

By following a budget, you get a sense of clarity and direction, which will motivate you to keep going to execute your financial plan and goals. In your monthly budget, you plan how to spend your money or what bills to cut but most importantly, evaluate your budgeting plan each month to adjust and improve it. Remember, not all expenses are the same every month, so you need to review your budget as you get into a routine.

Type of budgets

Traditional budgeting: In this kind of budgeting, you write down your income and expenses on paper and subtract your monthly bills to see the result. And then save or invest whatever is leftover. It is the simplest method of budgeting and can help you monitor your finances with ease.

Budgeting with 50/30/20 Rule: In this budgeting method, you allocate percentages to areas of needs, wants, and savings instead of particular dollar amounts. The amounts that will go to each bucket depending on how much money you made each month. This kind of budgeting gives you an easy guideline to help you get into a financial routine without sacrificing your spending needs.

Here is how you can allocate your after-tax earned income:

• 50% of your income to cover your needs such as Housing, food, health insurance, utilities, transportation, and childcare.
• 30% of your income to cover wants such as hobbies, clothing, vacation, gym memberships, movie tickets, subscriptions, and concerts.
• 20% of your income goes to your savings and emergency funds.

Cash budgeting: In this type of budgeting, you use cash only to pay for your bills and expenses identified in your budget. There is something different about trading with cash. For example, if you walk into a department store with $100 in cash and walk out with only a few items that in your mind are not worthy of $100, paying with cash will make you notice how expensive things really are and may help you realize that you wasted your money on things you probably don’t need. It makes you understand the value of the hard currency even more.

Trading with cash makes you watch your spending, which is impossible to do when swiping your debit or credit card. The ease of swiping a credit card makes it harder for some people to detect when they are overspending.

Although trading with cash money keeps you out of debt, it also has its drawbacks. One of the drawbacks of trading with cash is that you will have no credit, affecting your purchase of a home down the road. Remember, not all debt is bad; if you know how to leverage debt to get ahead of the pack, you can easily achieve desire results.

Spending first budgeting: Here, you prioritize spending, pay your bills first, and then allocate whatever is left over to fund other things later. This can be beneficial if your expenses are way less than your income. However, it can be hard to keep up with irregular bills, especially if you live paycheck to paycheck.

Saving First Budgeting: I call this kind of budgeting “pay yourself first budgeting.” You pay yourself first regardless of what happened later by automatic direct transfers from your paycheck to your savings bi-weekly or monthly. This budgeting method will help you build financial stability faster because it will force you to live within your means.

You may have to compromise on your spending later, which may help you to create financial discipline and better money habits. Saving first budgeting will also help you curb overspending, meet your saving goals, and make the quickest path to financial stability.

In conclusion, there is no one size fits all budgeting method. Everyone has different financial needs and goals. It is up to the individuals to pick a budgeting method that will help them meet their needs based on their own circumstances. For instance, if you have a spending problem, you may need to use the 50/30/20 rule budgeting to help you get into a financial routine and eventually change later. This can help you slowly get into budgeting and financial habits because it allows spending for your wants. If you’re a good saver and have the financial discipline to do so, you may need to choose the pay yourself first budgeting method because it will help you build your savings and emergency funds faster. In return, you can invest your savings in the stock market, Roth IRA, or purchase a home. 

Therefore, having a financial plan is better than having no plan at all. I believe that you will still be better off than someone spending money on a whim. I suggest writing down your financial plan on a piece of paper so you can refer back to it each month and follow a simple budget to help guide you in your financial journey.