Personal finance revolves around management of an individual or family to do
things like budgeting, saving, spending, and investing over time. It also involves
considering the risks and consequences that go along with these decisions.
Someone who wants to take a deeper look into personal finance must also gain an
understanding of debt consolidation, emergency funds and market volatility. There
are a lot of rules of thumb that go into managing these different aspects in the
most effective way possible so I want to cover as much as I can. This post will focus
strictly on budgeting, which is one of the most fundamental aspects of personal
finance.
HOW TO BUDGET
Budgeting efficiently can be a very time-consuming, but rewarding process. But it’s
a necessary part for those who are looking to get their finances straightened out as
much as possible. It involves comparing your fixed and flexible expenses per
month. Then you’ll want to use those numbers to determine how much money
should be set aside. Getting these numbers is a good way to set you up towards
any financial goals you may have, short-term or long-term. The further back you go
with calculating these expenses month by month, the better. Calculating over a
longer period of time will give you a more accurate average of these values.
The 50/30/20 rule is a very common way that many suggest beginners to handle
budgeting. The rule suggests that 50% of your income should go towards
necessities (bills, gas, groceries, etc.). 30% should go towards wants
(entertainment, travel, hobbies). The other 20% should go towards savings/paying
debt. The 50/30/20 rule is a great way to assess how much money you are putting
into each of these categories. It also gives you the opportunity to reassess if you
need to. Like many “rules” in finance, the 50/30/20 rule is merely a suggestion.
However, I do believe it is a good starting point for budgeting and you can adjust it
accordingly if need be.
STICKING WITH IT
Budgeting is a great way to get a visual idea of where everything is going and gives
you the opportunity to make tweaks if you’re not satisfied with where you are. You
could use an excel spreadsheet/Google doc and there are also even mobile apps
that can help such as NerdWallet. Budgeting is all about consistency, so having
software or a visual aid will only increase your consistency. If you aren’t keeping up
with your results, it largely defeats the purpose of budgeting.
Along with budgeting, building an emergency fund is another important step
towards getting your finances straight. At the absolute minimum, you want about
$1000 saved. Ideally, you would want three to six months’ worth of living expenses
saved. Having an emergency fund can prepare yourself for any financial curveballs
that could come your way. Once you set up your emergency fund, a common
suggestion is to look into investing. This can be a great way to build more wealth in
the long term.
