I've now talked about why you should budget, so now let's talk specifically about how to budget before going on to budgeting tools. There is one method I would like to talk about called the 50-30-20 budget. It is often important to break down your expenses into different categories, and generalizing them into three overarching sections can help simplify your budget and make it more easy to read. This budget uses the Balanced Money Formula which breaks down your after-tax income into three categories: 50% needs, 30% wants, and 20% savings. I've pasted the image below so that you can get an idea of what it looks like.



They define needs the same way I do necessities: your rent, food, health care, transportation, insurance, clothing. Wants are cable TV, cell phones, books and magazines, vacations, and food and clothing beyond the basics. Again, they also recommend that this is a guideline instead of a bible. For example, I would probably move the phone bill to necessities in my budget.

Also, the 50-30-20 budget breakdown can be adjusted to your desires. For me, savings would probably take up more than 20% simply because I don't have many wants besides my needs. Right now, about half my income is spent on necessities, albeit I do go out and eat at a nice restaurant once in a while, and the other half I usually just save. I try to take advantage of free internet and free food events (which I will probably have a post about later as well) so my formula is pretty different.

The main takeaway is to shift the weights to match your goals. Your basic rent and insurance premiums probably do not change month to month, so after a while you should be able to see what percentage it is of your income. Find out if your needs takes up 30% or 50% or 70% of your income and learn what excess income you have to allocate to wants and savings. If you plan on making a large purchase in the near future (a house or a car), you may want to have savings take up the majority of what's left of your after-tax income after your needs. If you don't plan on purchasing anything big for a while, perhaps you can spend more on your wants and save a little less (but hopefully after reading about how much your savings can grow, you will be a little more enticed to save).

So, figure out your goals in terms of your plans for large purchases over the next few years. As a college student, it may be a while before you start really thinking about buying a house and a car but it shouldn't be too far off. Remember that budgeting is simply a guide to let you know how strong you are setting up your financial position for the future. If you want to celebrate during Christmas and spend most of your income after your needs on high-end restaurants and a shopping spree, go for it as long as you are okay with it. But you should always try to save at least a little of your paycheck for emergencies to have some margin of safety. With later posts, whatever money you do save should be able to grow significantly to help you out when you do need it and you should be able to feel secure with your finances.

How do you budget and what has worked for you?

Hi everyone. So first, I wanted to mention that I blog about personal finance, mainly targeted to college students and young adults looking for a one-stop source to get all their information. I'll post some more relevant educational stuff on SavingAdvice, but I'll try to post some more day-to-day blog update type entries as well. Please comment if you want to see something specific on here since I love to research new areas of personal finance and feel free to check out my original site (you can just google The Smart Nickel).

I'm sure most people on SavingAdvice know the reasons why budgeting is so important, but I thought it would be a good start for this blog to go over the reasoning before looking at actual budgeting techniques.

Budgeting is a critical control technique to try to take out emotions from our purchasing habits so that we don't overspend and put ourselves in debt. However, people often don't take the initiative to budget because of the limitations it puts on them and it is a little tedious to do. There are lots of applications to help you budget, and I by no means have tried them all. I will try to focus on some of the major reasons why you should budget and talk about how to do so easily with basic programs in a later post.

First, why should you budget? I believe that it is extremely important to know where your money is going. A lot of people think that the number one reason is to limit their expenditures, but I would argue that the primary reason you should budget is to be aware of what you are spending your money on. Is most of your money going into rent and groceries or high-end restaurants and shopping malls? Setting limits is fine, but there isn't any extrinsic force that will punish you for going over your budget limit. You are in control of your finances; as long as you are aware of what you are spending your money on then budgeting will have been successful regardless if you stayed under your limit or not. This means though that every time you make a purchase, you will have to record it somewhere. This can be pretty tedious for some people but I will talk about certain tools you can use in a later post.

The next and more obvious reason to budget is to control your spending. A lot of people suffer from impulsive shopping and often spend more than they can afford. This is often overdone in combination with credit cards (a few articles I have written which you can see here) since with a credit card, you don't actually need to have the cash on you to spend it. And business often try to do everything they can do facilitate consumer spending. Do you know why milk and eggs are always in the back corner of every grocery store you visit? It is so that you have to go through the other aisles first, to entice you to see something else you need to buy. Online shopping has exploded with the internet and now all you need to do is enter a credit card number and click a few buttons to spend as much as you want. Now, while you are still in control of your spending urges, you can logically plan out how much money you can afford to spend in the next week, month, or year and how much you want to save for future spending. These limits that you set don't have to be concrete, but they should be a very good guide about how much you are logically willing to spend over a given timeline.

Let's say you budget $200 for food this week. However, your best friend gets a job offer in the middle of that week and you all decide to go out to a very fancy restaurant to celebrate. You end up going over budget. Have you failed at budgeting? No, you had a general idea of how much you were going to spend and you know what circumstances led to you going over budget. Obviously, this example is a little different from setting a budget of $200 for clothes and then getting so excited over a sale at the mall that you spend $400, but in either case you can look back and see how your actions measured up to your expectations. In the shopping case, maybe it would be good to total up your purchases before going into the check-out line. Or maybe you should increase the size of your shopping budget if you are okay with spending that amount. However, given a limited pay check, whatever you move into shopping will have to come out of something else and if it turns out that you would have to cut food or rent, you may end up rethinking your spending habits.

Again, you are in control of your finances. Hopefully, this post has been able to show you how useful a tool budgeting can be in order to meet your goals and expectations. My next post will be about how to specifically budget by using excel, apps, or other programs. Combined with later posts about savings and investing, hopefully you will be able to create a comprehensive idea about how you can maximize the value of your money in the present and for the future.