When it comes to budgeting, a large segment of the world’s population seems to be averse to it. In fact, when you confront an average youngster regarding this concept, you’re bound to hear excuses like ‘budgeting requires extensive financial knowledge’ or ‘budgeting is time-consuming’. What they fail to realize is that budgeting is actually one of the simplest ways to improve the financial health of an individual.
If you’re a youngster who has just started earning, creating a budget can help you manage your money and plan for your future in a much better way. That said, here are five things that you should know with respect to budgeting for financial health.
1. Understand your income
Before you set out on creating a budget, the first thing that you should do is get to know your income. Many individuals tend to have both fixed and variable components in their income. The fixed components are likely to not change frequently, whereas the variable components can either go up or go down depending on the circumstances.
Some examples of variable income include allowances, bonuses, and commissions income. Knowing what proportion of your income consists of fixed and variable components allows you to plan your budget better. For instance, you could plan your luxury purchases to coincide with your bonus or commission income instead of using the fixed component of your income for them.
2. Take a good look at your expenses
Listing out your expenses is an important part of budgeting. It allows you to visualize your spending habits. Such a financial planning exercise can help you easily identify holes in your budget. Once you’ve charted out all of your expenses, go through them one after the other and rank them according to how important they are in.
For instance, the expenses towards rent, electricity, and water should ideally rank higher in terms of importance than your entertainment and leisure expenses. After you’ve ranked them, cut down on the expenses that you deem least important in your life. This way, you can save a lot of your money, thereby significantly improving your financial health.
3. Focus on savings and investment
The earlier you start saving, the better off you are in the future. This is something that most finance experts seem to agree on. Irrespective of how small you think your savings are, always invest them. If you start saving as soon as you get your first paycheck, you could get a huge head start, ultimately leading you to your financial goals in a much shorter time frame.
This is where budgeting comes in handy. It allows you to focus on savings and investment by encouraging you to spend carefully. The excess amount of money that you get to save by cutting down on wasteful expenditure can then be invested in safe and reliable investment options. Ideally, you should design a budget that allows you to save and invest around 20 to 40% of your income each month.
4. Have an emergency fund
While drawing up a budget, it is very essential for you to account for future emergencies and contingencies. As you know by now, life can be quite unpredictable. The budget that you design should allow for the creation of an emergency fund or a contingency fund. By creating such a fund, you can safeguard your financial health and keep it from deteriorating due to unexpected events such as a job loss or a medical emergency.
The emergency fund that you create should preferably contain around 6 months of your income. Once you’ve reached the 6-month threshold, it is advisable to continue your contributions to the fund instead of discontinuing it altogether. One way to go about creating the fund is by diverting a part of your monthly savings towards it. For instance, if your budget lets you save around 40% of your income, you could divert a portion of it towards the fund.
5. Have an end goal
Financial planning without any end goal in sight won’t get you very far. Having a financial goal in mind while drawing up a budget can help you accurately plan and execute your strategy. Your end goal could be virtually anything from saving up for a future vacation or buying your own car to creating a retirement fund or getting the down payment for a house ready.
Since budgeting involves making financial sacrifices, having a goal at the end can make the journey more worthwhile. In addition to that, it also makes sticking to the budget much easier.
Financial planning through the use of a budget helps you understand your finances more clearly, thereby giving you more control over your money. While budgeting might seem like a chore, in reality, it only requires a little bit of time and effort. The benefits that you get to enjoy from it far outweigh any disadvantages that you may perceive.