Learning new ways to become more financially savvy is always a good idea. The sooner one can establish a strong foundational understanding of their personal finances, the sooner they’ll gain financial confidence to make money decisions. While certain financial tools like credit cards and personal loans can help cover unexpected expenses, learning to budget is great preparation for managing financial tools responsibly. Just begin with a few simple steps to establish good money habits.
Track income and expenses
Recording all financial activity for a minimum of a month can offer insights necessary for developing effective habits. It helps raise awareness of where money is coming from and where it’s going to identify unnecessary expenses or possible changes that may improve money flow. Some apps will do this automatically by analyzing bank account deposits and charges, then categorizing them to give the account holder insights into their finances.
Each person’s financial goals may look a little different. It is generally beneficial to establish a set of short-to-medium-term goals and at least one long-term objective that motivates changes in financial behavior. For example, someone’s medium-term goals may be to (1) aim to build an emergency savings account and (2) cover outstanding credit card debts over several months. Their long-term goal might include paying off student loans, planning a wedding, or buying a home. These concrete targets could help shape a person’s budget and encourage them to save.
Find a budget that works
Tracked expenses and financial goals make an excellent structure for a budget. The ideal budget should incorporate necessities, wants, debts, and savings. Different budgeting methods may work better in different situations, making it crucial to an individual’s personal finances to find the right one. Below are two popular options for beginners:
The 50/30/20 budgeting method allocates 50% of a person’s income to necessities, which are the expenses that must be made like rent, groceries, utilities, and childcare, for example. Then, 30% goes toward a person’s wants, which people can survive without even if they make life better. Each person’s wants and needs may differ; a smart phone with a big data plan, for instance, might be a critical part of one person’s daily life while a cheap flip phone would work for another person. Finally, the remaining 20% should go toward saving and repaying debts.
The suggested ratio of 50/30/20 can be adjusted based on a person’s situation as well. People with lower incomes or higher necessary expenses may need to put 80% toward needs, and then would have to allocate the last 20% toward both wants and savings. The important thing is to set a structure and work toward it every month to get in control of one’s finances.
Simply, zero-based budgeting means that a person’s income minus their monthly expenses should always equal zero. It requires a detailed budget that allocates every dollar a person receives each month into a fixed category. Zero-based budgets are highly customizable. They could include many sections, like “rent” and “groceries,” but also “retirement savings,” “credit card debt,” or “movie tickets.” Everyone’s budget should include a section for emergency savings in case unexpected expenses occur.
Automate whenever possible
Every individual has different goals and budgeting constraints based on their financial needs. No matter the approach, it’s important to stay organized and disciplined throughout the process. This can be achieved with apps like Oportun that help people automate loan payments, saving, and investing. Implementing such a tool can allow individuals to focus more on the financial approach that works best for them.