I am a 25 year old girl living alone and having to make some critical financial decisions. Personally, I mostly struggled with allocating my finances for ‘stuff’ I really want without falling short of other necessities that I really need. Making these financial decisions has been a learning curve that has ultimately allowed me to start thinking about the importance of  financial management such as budgeting and staying financially disciplined. I would like to share 5 steps that I have been following to help me draft monthly budgets, but before I get into that, I would like to start by discussing some basic concepts and phrases.    

What is a personal financial budget?

 A personal budget is a spending plan for your money that allocates future personal income towards expenses. In simple terms, a budget shows where your money is coming from and where it all goes each month. 

 Why is budgeting important?

“Budgeting allows you to determine in advance” whether you will have enough money to do the things you need to do or would like to do. It makes you focus your money on the things that are most important to you and how much money you will be able to save.

The 50, 30, 20 ratio

For this article, I asked my sister, a budgeting legend and an accounting and financial management major, to share some tips on how she budgets efficiently. The one tip that is most relevant is the act of splitting your budget into three sections (depending on what works for you). For example, you can divide all your income into a ratio of 50, 30, 20. This is the method that I also use, and I can firmly attest to it. At least 50% of my salary goes to essentials (these are the things that are needed and usually paid every month such as rent or mortgage, water, electricity, and grocery and toiletries). 30% “wants” (goods that are needed regularly like a new pair of jeans – anything that is not a necessity). And last but not least, 20% goes towards savings. 

 5 steps to follow when drafting a budget:

 Step 1

Gather all the relevant information such as your financial statements and bank statements and or mortgage statements. 

Step 2 

Use the information from step 1 to calculator your income and identify your expenses

 Step 3

Draft your budget. Write down a list of all the expenses you expect to have during a month.

There are two types of expenses, fixed and variable expenses.

(a) Fixed expenses are those mandatory expenses that you pay the same amount each time. For example,  rent, electricity, water, etc.

 (b) Variable expenses are the types that will change from month to month.

 If your income is higher than your expenses, that means extra savings. If expenses are higher than your income, find areas in your variable expenses you can cut off to balance the budget. This is called expense adjustment.

Step 4

Track your expenses or spendings to ensure that you are within your planned budget. Ensure that you record what you spend throughout the month to keep you from overspending which will help you identify unnecessary expenses.

Step 5

Keep checking in. It is important that you review your budget on a regular basis to be sure you stick to your budget.

EndNote

Overall, budgeting is a great way to acquire as much financial freedom as possible. On a personal note, as someone who is a food junkie, I have realised that if I don’t include occasional take-outs and entertainment in my budget, it results in unplanned savings expenditure. So for the past few months I have been able to readjust my savings and it seems to be working out well. Yes, sometimes it leaves me broke (hahah…) but at least I know that my savings are secured, which ultimately gives me a senses on financial security and financial freedom. 

 

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