Basics of Financial Literacy: Budgeting
It is a shame that most countries’ education systems do not include financial literacy as part of their curriculum, because it is a very useful set of principles that will benefit people regardless of their age, gender, and social status. And it is not even that hard – you can start simple: with budgeting. And you can start with budgeting by just plunging right in.
Financial Literacy in a Nutshell
At the base level, budgeting is as easily explained as knowing exactly how you are spending your money, as well as finding out and addressing your financial holes. The steps are numerous, but they can be easy to remember as long as you know their primary goal.
#1. Tracking Monthly Expenses
This is the first step, and fortunately it can be easily done with the help of a notebook. Or if you prefer to keep up with the times, you can use a mobile app. The important part is you have to be diligent, because this step can be easy to forget. Yet it is the most crucial part because it is the foundation of budgeting.
#2. Identifying Fixed and Variable Expenses
Next, you have to find out what your fixed and variable expenses are. Fixed includes the expenses that arrive on a fixed schedule in amounts that are consistent, such as rent, utility bills, mortgage, loan payments, etc. Variable, on the other hand, are expenses that can vary from month to month in value and schedule, such as grocery expenses, pet supplies, luxury items, etc.
#3. Get the Sum Total
After a certain period, usually 3 months, you can calculate how much you are spending on average on a monthly basis. Crunch all the numbers here and study the details – separate expenses by categories, degree of importance, etc. The mobile app will help a great deal in the sorting, or you can use an excel spreadsheet.
#4. Study the Variable Expenses
Keeping an eye on your variable expenses is vital to maintaining a budget, because it is where people tend to overspend. There’s nothing inherently wrong in pampering yourself from time to time, but you have to find which among the variable expenses are the most worthwhile of their cost. And try to find ones that you don’t really need, and can live without. Then you know which ones you need to cut. Don’t be afraid to make the hard decisions, and to go out of your comfort zone. Nothing is permanent anyway, and you can bring expenses back if it turns out that you can’t live without them.
#5. Consider Savings as Part of the Equation
Savings is part of budgeting, but most people find it hard because they would rather spend it on something they want. However, it is much easier to free yourself from this mindset by adopting a new perspective: savings are actually a way of paying yourself. Make sure every paycheck, you set a little bit aside and put it into savings. If you make a habit out of this,m it can pay dividends throughout your life.
#6. Finally: Set Your Budget
Once you get all of the above out of the way, you can finally make the necessary cuts and set your final budget. You are on your way to financial literacy: cut the fluff off of your fixed and variable expenses, add to your savings from time to time, and live on the leftover money.