Revenues. Expenses. Economy. Invest. Protect. All of these are part of personal finance. Yes, these are components of a personal finance plan. However, while a personal finance plan may seem arcane, a budget is not. As a result, the latter tends to be more popular, especially in informal circles. However, when people talk about developing a personal finance plan or a budget, they mean the same thing.
So how do you create a personal finance plan? How to design a budget? Is there a strategy? Here we provide a reasonable introduction to it.
So you win. But, how are you doing? This is your challenge. Of course, your expenses will ideally include things like savings, investment, and protection. So how do you spend your income on these? For this, you will need to create a spending plan. The spending plan is a budget. The fact of allocating the resources of your income to the various expenses is budgeting.
At the heart of budgeting is opportunity cost. It is the theory that if your resources are limited, your needs are not. Therefore, you must prioritize the expenses that are important to you.
Budgeting has many benefits. Your income is limited. As a result, you are limited in your expenses. So your options are to spend less than you earn or strive to earn more. The first is easier: you can even start right away. To do this, you can start making friends with budgeting. You can set a budget for your daily finances.
Budgeting helps you balance your expenses with your budget. When you budget, you become aware of your bad spending habits and financial leaks that you need to plug. It positions you better to handle emergencies. Last but not least, by preventing you from spending money you don’t have, budgeting helps you save yourself debt and prepare for a fulfilling retirement life.
There are many budgeting principles to follow. However, the most popular of them is the 50/30/20 popularized by Senator Elizabeth Warren. The rule is to spend your earnings, your after-tax income, so: 50% on needs, 30% on wants, and 20% on savings.
Needs are those things you can’t live without. These are bills you need to take care of. These are rent, insurance, groceries, insurance, health, etc. These are obligations that you must respect. You can die if you don’t meet your needs.
Desires are your desires. They are not essential. You can do without it. They include movies, handbags, sporting events, expensive gadgets, and more. You won’t die if you don’t get what you want.
You shouldn’t just work and fulfill your needs and desires. You must also register. Remember the proverb: except for rainy days. Your savings will come in handy for emergency expenses and retirement. You can even save towards a goal. You can use a Individual Retirement Account (IRA) for that.
Another popular budgeting principle is the 70/30 rule which can be broken down as follows:
70% on monthly expenses
Using the 70/30 budgeting rule, you allocate 70% of your after-tax income to your monthly expenses. These expenses include rent, shopping, utilities, groceries and others.
30% on savings and retirement
The remaining 30% of your after-tax income in the 70/30 budgeting rule is allocated to saving (20%) and investing for retirement (10%). If you are in debt, you should set aside part of your savings allowance for debt repayment.
In conclusion, the percentage you allocate is not that important. The most important thing is that you understand the principles of budgeting and apply them.