Lesson 3: Personal Budget
Now that we’ve covered the basics of currency, value, and earning power, let’s talk about creating a personal budget. Say, for example, there are some things that you want to buy. Maybe a new pair of shoes, the latest iPhone, a 24 karat gold chain, or even a new car.
The process of organizing your money to pay (or not pay) for different types of goods and services is called budgeting. A budget helps determine how much money to spend and how much to put aside for savings and unexpected events. A budget also helps to separate your spending into wants and needs. Creating a budget and sticking to it can effectively save your money for large and unexpected expenses.
Imagine you are playing basketball and sprain your ankle. It may be difficult to pay the doctor’s office for the x-rays and brace you need without a budget. By creating a budgeting plan, you can control the situation and get through this time without significant financial concern.
The process of creating a budget is very straightforward. There are only three things you need to start creating your very own personal budget:
You need to know your income, which is how much money you earn in a given period of time.
You need to know your expenses, which is how much money you spend in a given period of time.
You need to know how you can modify your spending habits to save for unexpected events and get the most value out of your money.
Expenses can be split into three categories to make budgeting more clear. The first category is fixed expenses. These are expenses that occur regularly and do not change on a month-to-month basis. An example of this would be rent, which is generally a consistent amount every month.
The second category is flexible expenses. These, like fixed expenses, occur regularly; however, you can control how much you spend on these flexible expenses. An example of this would be gasoline and money spent eating out; you can control the amount you spend on gas and how much you spend at restaurants.
Finally, the third category is discretionary expenses. This is money that you choose to spend. This category also includes money that you save and the money you spend on things like that 24 karat gold chain or tickets to see Marvel movies with friends.
In broad terms, approximately 50% of your budget should be devoted to fixed expenses (housing, debt, and utilities). Another 20% should go towards flexible expenses (food, clothing, medical bill, and transportation). Additionally, 10% can be used for discretionary expenses (movies, new clothes, video games, excluding savings); it’s important to have fun with your money. Lastly, the final 20% should be set aside for savings and debt repayment.
Everyone has a different budget with different allocations depending on your income, where you live, and other factors. Use this as a general guideline but stick to whatever plan you set for yourself. Remember that your future self will thank you for a responsible budget with good savings.
The important thing to remember as you create a budget is that it is a personal plan. Everyone has spending habits, but as long as yours are responsible and fit your plan, your budget can be as flexible or inflexible as you’d like. If you still want a 24 karat gold chain, that’s great! Just make sure you have adjusted for it in your budget so you can stay prepared for whatever the future may hold.
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Sources:
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“What Is a Budget?” Personalfinanceimu, brightstarlearning.wixsite.com/personalfinanceimu/what-is-a-budget.
https://brightstarlearning.wixsite.com/personalfinanceimu/what-is-a-budget