Budgeting 101
One of the many steps toward financial independence includes learning how to budget. While some may have been introduced to the skill at a young age, others may have never been educated on the matter. However, it is never too early or too late to educate oneself on budgeting, as we all strive to meet financial goals at any age.
What is Budgeting?
In simple terms, budgeting is a system in which you track the money you gain (income) alongside what you have spent (expenses) over a given time period. Budgets can be tracked monthly, quarterly, annually, or however often it is necessary, based on personal preference. With that said, budgets are meant to be personalized, curated to fit one's lifestyle, needs, wants, and financial goals.
Step 1: Review Income Streams
To build your budget, you must first know how much income you have on a regular basis. Income may include paychecks, allowances, scholarships, work-study earnings, and other miscellaneous funds. It's also important to remember how often you receive money from each source. For example, paychecks from work may come every two weeks, whereas a scholarship award may be a one-time sum each semester.
Step 2: Track Expenses
After establishing your income streams, you must track your expenses, either manually or automatically through a third-party system.
Manually tracking your expenses requires you to log every transaction and deposit you make, usually through a spreadsheet or rubric-style worksheet. If you want to develop a disciplined routine or prefer to hold yourself accountable by auditing your spending behavior, this approach may be the best fit for you.
Here are some budgeting tools that may be helpful:
If you are an Excel user and prefer automated calculations: Microsoft Office/Excel Templates
If you are a Google Sheets user and prefer automated calculations: PERSONAL MONTHLY BUDGET TEMPLATE
If you prefer a more visually appealing tool: Canva Templates
If you prefer a simple, non-automated approach: Budget Worksheet
The Federal Trade Commission also offers information and resources on financial management and education, including budgeting.
On the other hand, automatically tracking your expenses through a third-party system involves granting permission to applications to access your bank accounts, credit card information, and other financial accounts relevant to your spending. If you struggle with consistently logging your financial activity and are comfortable with sharing your information, this approach may be the best fit for you. However, because it is a third-party system, remain cautious and conduct your own research on each application's security and privacy.
If you would like some application recommendations, Forbes evaluated and identified 10 budgeting applications for download. It is also recommended to try different applications and settle on one that is compatible with your accounts.
Step 3: Categorize and Prioritize
As you finalize a budgeting tool, you must also categorize the kind of expenses you typically have and determine their priority based on your financial goals and responsibilities. Categorizing your expenses can mean differentiating what is a "need," expenses that must be paid, and a "want," expenses that you solely take pleasure in spending.
Needs can include the following:
Rent/utilities
Car payments/insurance
Groceries
Pet expenses
Loan/debt payments
Retirement
Wants can include the following:
Entertainment
Travel
Shopping
Subscriptions
While these are examples, everyone's needs and wants vary, depending on how much they choose to allocate to each category.
Once you have categorized your expenses, prioritizing each category will help determine how much money you allocate. For example, while traveling is not a need, you may greatly prioritize it and want to set a budget that supports your goals while still balancing essential expenses.
By employing the SMART goal method, you can set financial goals that guide your budget.
Step 4: Reassess and Readjust
After categorizing and prioritizing your expenses, you can use whatever budgeting tool you have chosen! Set aside time for you to evaluate your spending behavior for a period of time and ask yourself if you need to readjust your budget. For example, unexpected expenses or a surplus of money may impact your financial well-being. Refining your budgeting tool to accurately reflect your financial bandwidth will set you up for success.
Developing a consistent savings habit is key to achieving financial independence and preparing for the unexpected. For teenagers, this practice can support goals like purchasing a car, funding extracurricular activities, or saving for college. For adults, it provides the foundation for building an emergency fund, traveling, paying off debt, or securing long-term financial stability.
By: Rachelle Gamboa & Henos Kiflemariam