Financial Literacy 101: Budgeting
Welcome to Insedia Back to Basic’s five-part series on Financial Literacy. Throughout this series, we’ll be examining some of the most important fundamentals in financial literacy. These principles will help guide you in how to make better financial decisions, no matter where you are in your life. Up first, we’re exploring the concept of budgeting, and why it’s so crucial to cultivating financial success.
Budgeting is the act of planning for your future income and expenses. With such a simple definition, you’d think it would be easy to master, but the reality is two-thirds of households don’t have a detailed budget of how to spend their money.
Why Budgets Are Important
Without a budget, people tend to spend money without much forethought. They pay their bills, go out to eat, and buy goods until the money runs out. Budgeting creates a system of priorities; it tells you in advance how much money you’ll have to spend, and gives you a blueprint for how best to spend it. For example, your rent or mortgage usually comes first (because you need a place to live), followed by groceries and utilities, followed by other necessities, followed by debt payments and finally, savings (which we’ll dig into in a future segment). Entertainment and recreation are the last things on this list, which means you have less money to spend here. Accordingly, if you follow the budget, you’ll make sure you have enough money for all your necessities and you’ll have an easier path to saving whatever’s left.
Important Budgeting Principles
These are the most important factors to be successful in budgeting:
- Premeditation. You need to plan your budget in advance, not look back at your spending retroactively.
- Consistency. You should have a budget every month, consistently, or you could easily miss your targets.
- Prioritization. Priorities are different for everyone, but you need to have a hierarchy of prioritization guiding your budget’s outline. What’s most important? What’s least important? Where is the line?
- Goal-orientation. Everything in your budget should be geared toward a goal, which is different for everyone. Are you trying to pay down debt as fast as possible? Save in excess? Get a lot of spending money? These goals will help guide your budgeting decisions.
- Accountability. Finally, you need to hold yourself accountable to your new budget by staying within its boundaries or it has no practical value.
It may be intimidated to get started with a budget, but remember, there’s no right or wrong way to format and plan your spending. Whether you create a beautiful, detailed spreadsheet, or just scribble some figures on a napkin, you’re planning ahead and prioritizing—and that action will go a long way in helping you financially succeed. The more consistent you are with this planning process, the easier it will be to achieve your financial goals.
As always, if you’re interested in learning more about financial literacy and how to get your finances back on the right track, be sure to join the Insedia community!
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