Side Note Before Reading:
The information in this article is going to be most useful to people heading out to college or just entering the world outside of high school. You can also practice this now by tracking your income and expenses, even if you currently rely on your family to cover most of your costs. When you do end up tracking your budget, it is important to do it regularly and to know where your money is going at all times.
The Importance of Budgeting
Businesses very carefully check their revenue, expenses, and profits to measure success. Individuals can apply this same principle to their personal finances by treating their money like a business. Managing your money effectively is one of the most important skills you can develop, though it remains one of the least taught. That’s where the importance of budgeting stems from — it allows for greater awareness of your spending and efficient allocation of your money.
The Budgeting Technique
One budgeting method which I highly recommend is to look at your personal finance as a business. Your after-tax income (money earned from working) represents your revenue (total amount of money earned by a business before expenses), while your spending on necessities and discretionary purchases (non-necessary purchases) represents your costs. What remains is your surplus/profit which tells you exactly where your financial situation stands. Viewing your finances in this way gives you an increased ability to see what expenses can be reduced or adjusted to improve your profit margin. These potential reductions may include discretionary purchases such as dining out, subscriptions, and impulse purchases or even necessary purchases that can be reduced such as housing costs. These unnecessary expenses may be reduced, increasing your profit margin and providing more opportunities to save, invest, and build wealth. By reviewing your money on a month-to-month basis using this system, you can better realize exactly where your spending is going and easily figure out what opportunities are there that could improve your financial position.
Surplus After Budgeting
The next step after budgeting is what to do with that surplus at the end of the month for yourself. The first priority is ensuring minimum debt payments are met. After finishing that, you can continue to knock down the debt total or look for opportunities to increase your retirement fund. Another priority is to create an emergency fund and slowly build it to cover unexpected expenses or periods of reduced income. Once debt is managed, retirement contributions are in order, and an emergency fund is strong, the remaining surplus presents a great opportunity to increase your wealth: Investing in stocks, bonds, and ETFs.
Final Takeaways
Budgeting is an important process of tracking how money goes in and out of your life. Tracking your money and understanding where it goes can give you a much clearer picture of your financial situation and help you make better decisions in the future. I highly recommend using a budgeting technique like the one presented and I wish you the best of luck tracking your money in the future.