Do you splurge more than what you make?
If so, you are most likely stretching your paycheck or living on credit cards. So, it’s high time to plan a budget and start following it!
Well, you can consider a budget as a baby step to your financial success! Following a budget helps you stay organized, make a habit of savings, and control your overspending! Altogether, you can become a master in managing your finances!
Is Planning a Budget a Panacea to Your Financial Problems?
A budget is less likely to solve all your financial problems. But it does help you to track your income, expenses and save money. You have to strictly follow your budget, no matter what. And having sufficient money might help you handle your financial problems in a better way!
But to achieve financial success, it’s important to grow your money! Let’s say you are accumulating your dollars in a checking account. The interest rate offered usually varies between 0.01% to 2%.
You can crunch the numbers and get an idea of how much you will earn on the interest. That’s why you should look for opportunities so that your dollars get a chance to grow!
What if I tell you that following a budget can help you in growing your dollars?
Yes, you heard it right!
But before we proceed, let’s check which budget plan is apt for you! And if you have already planned your budget, check whether or not you can follow! That’s why planning a realistic budget is very important!
Traditional Budget
Most of us are very familiar with this budgeting. Just relax and sit down with all your expenses and your monthly income from all sources. Then chalk out a budget that will curb your overspending and help you make a habit of savings.
50/30/20 Budget
In this type of budget plan, you allot a specific percentage of your income into 3 categories.
| Needs | Wants | Savings |
|---|---|---|
| 50% | 30% | 20% |
Envelope Budget
Are you unable to track your expenses?
If so, you can try this budget plan once. In this type of budget plan, you can stash cash in different envelopes for various categories like utility bills, food, rent, insurance premiums, transportation cost, etc.
First, determine the amount you wish to allocate to each category and keep it in the respective envelopes. For example, you can label one envelope as rent and keep the allotted amount inside it.
Zero-based Budget
It involves creating a budget plan from scratch. You have to allot money to various categories like living expenses, insurance, debt repayment plans, savings, emergency funds, etc. The difference between your income and expenses should be the magic figure zero. It means you have to use every dollar you earn.
However, it does not imply that you can waste money. You have to spend dollars for a fruitful purpose.
The most significant benefit of a zero-based budget is that it helps to lower expenses by checking out the areas where you can reduce cost.
If you can save some dollars, allot the amount in some category or add it to next month’s budget.
5-Category-budget
This budget plan helps you to create a spending plan based on five categories. Here is how this budget plan works.
Segregate your budget into five categories and fix the amount you will spend for each category.
For example, you can decide to spend 35% of your monthly income on the housing cost.
- You can spend 15% of your monthly income on the transportation cost.
- You can spend 25% of your monthly income on living expenses.
- You can spend 15% of your monthly income to pay off debts.
- You can set aside 10% of your monthly income for savings.
Note: These are broad-ranging categories. You can break down each category into several subcategories.
Initially, it will be quite challenging for you to stick to your budget. For that, you can get some ideas to stick to your budget! Once you get obsessed with it, you will be one step ahead in your financial success!
But how does a budget help your dollars grow?
Let’s find out!
You Can Save for an Emergency
Well, life is uncertain and anything can happen at any point in time! Be it a minor or major exigency; you always need to be prepared.
So, apart from keeping aside dollars for saving and investing, you should pay yourself too! You might think, “what does that mean?”
You can distribute 10% of your monthly income to your emergency fund. You can utilize this money whenever needed during any emergency!
You can opt for high-yielding savings account for your emergency fund to earn a significant amount in interest.
The emergency fund is your savior during the rainy days. You can use it to cover your unforeseen expenses without depending on loans or credit cards. In other words, you can consider a rainy day fund as a shield to the obstacles in your way to financial success!
You Can Stay Away from Debts
If you are strictly following your budget, most likely
- You are not overspending
- You are saving a substantial amount of money
- You are building your emergency fund
However, there are at times, you can’t see any way out except taking out a loan. During any mishap, most of us tend to take out unsecured loans. These loans come with very high Annual Percentage Rates (APRs) and push you towards debt problems.
Every month you see a large amount of your paycheck getting deducted to pay off your debts! You are worried about what will happen to your plan of growing your dollars.
What is the solution?
The best option to revive your financial life may be opting for debt consolidation to solve your debt-related problems. However, avoiding debt problems is always better, and that is where a good budget can help you.
You Can Save for Retirement
Like the way you are spending money wisely now, it’s equally important to save for your retirement too! And for that, you have to build your retirement nest egg to relax during your golden years.
If your employer offers you a 401k retirement plan, grab the opportunity immediately! The best deal for 401k is the employer match for your contribution! Usually, the match amount varies from company to company. Many employers provide an exact match of what you’re contributing, but usually, there’s a percentage cap on the amount the employer will contribute. It is generally calculated based on your annual salary.
In 2021, you can contribute up to $19,500 annually of your pre-tax income to the 401(k) plan.
But what if your employer doesn’t offer a 401k or you are a self-employed person?
Don’t worry. You can opt for a tax-deferred retirement account! You can add a conventional or Roth IRA.
From 2021, if you have an adjusted gross income of less than $198,000, then you will be eligible for a Roth IRA! And you can contribute a maximum of $6,000 annually.
Whatever may be the case, you have to pay a certain portion of your paycheck towards the retirement fund. Here, the budget plays a major role. If you follow a budget, you can set aside money to build your nest-egg.
Moreover, a budget helps you stay away from running out of funds at the end of the month after making these contributions.
So, start investing in your golden years at the earliest!
You Can Restrict Overspending
Most of the people who don’t follow a budget end up overspending every month! Because of the lack of a proper spending plan, you might be buying unnecessary stuff. Eventually, you run out of funds before the end of the month. And saving some dollars or investing might be a distant dream for you!
The solution to this problem is to stick to your budget! It will focus mainly on your basic expenses and making necessary investments. As a result, following a proper spending plan will refrain you from overspending.
You Can Be Stress-free
The first few months of planning and sticking to your budget can be challenging for you! But you will feel the difference in your savings within a few months. It will give you a feeling that you have control over your finances.
A comprehensive household budget helps you to understand how much money you can spend every month. It especially focuses on spending on your necessary expenses only. And gradually you acquire a habit of spending less! And when you save money to meet your financial goals and build a nest-egg, you make your life better.
Altogether, you can get rid of financial stress. if you strictly follow a realistic budget!
You Can Be Aware of Your Dollars
A budget shows your income and expenses from a bird’s-eye view. You can see a clear picture of where your money is coming from and where it’s going out!
“Where have I spent my dollars?”
Now you don’t need to wonder at the end of the month like this. You can allocate your money for your basic expenses, retirement funds, investments, paying off debts, etc. Precisely, you can track every dollar you own!
What are you waiting for? Plan your budget asap and grow your money for a safe and secure future!
