From the viewpoint of individual life, budgeting offers the basic strategy of an effective financial planning path, enabling one to fulfill their financial goals. Unfortunately, many individuals, however, fear working out a budget simply because of the concern that budgeting will deprive them to enjoy many things in life. However, according to Scott Tominaga, a renowned financial advisor budgeting is the cornerstone of any financial planning, no matter whether it is about an individual or a business. Keep reading the article to know what is budgeting its purpose and why it is vital.
What is Budgeting?
The term ‘budget’ refers to formulating a plan, offering a roadmap to spend their money. Creating a plan for spending money enables them to figure out whether they can afford things or activities they wish to accomplish or prioritize their spending plan. Thus, budgeting is essential to managing one’s monthly outlays, planning for developing funds to face unexpected life events, and equally affording owning expensive items without making debt. Typically, individuals should make a budget every month while most businesses go for an annual budget and review the same periodically.
Role Of 50/30/20 Rule in Budgeting
According to Scott Tominaga, following the 50/30/20 rule is a proven way, as it fosters financial discipline in individuals by helping them to allocate their after-tax or net income in a planned manner. It simplifies the process of spending and savings by classifying one’s budget into three main groups – 50% of the net income should be spent for meeting needs, 30% of net income towards wants, and 20% for savings.
50% for Needs
Remember to keep aside 50% of net income to meet the needs or essential expenses that cannot be avoided. For instance rent, groceries, healthcare, educational expenses for kids, utilities, insurance premium, etc.
30% for Wants
30% of the income can be used to meet the wants or desires. For instance, watching movies, pursuing a hobby, going on vacation, hitting the spa, buying luxury items like mobile phones, etc. It is important to remember that while none can compromise needs, if necessary (under financial crisis), individuals need to curtail their expenses on wants while sticking to their savings habit. Also, putting aside 30% of their income offers individuals the flexibility to enjoy their life without comprising financial discipline.
20% For Saving
The remaining 20% of income must go towards savings and investments. Thankfully, saving offers a financial cushion to individuals to face emergencies like medical expenses, maintaining their home, or repairing their car, etc. Savings are also integral to staying financially secure to reach one’s long-term goals, like buying an apartment, letting children pursue higher education, and enjoy a quality retirement life.
Why Is Budgeting Important?
Budgeting is the basic to reach an individual’s financial goals. It helps individuals to live within their means while maximizing the benefits of their available resources.
Financial Awareness: Budgeting helps people gain a clear view of their income, ability to spend for necessities, and saving opportunities. Tracking budget plans helps them to determine their spending habit, avoid going beyond their capacity, and grow financial discipline.
Emergencies: An ideal budget plan directs to keep aside funds to encounter emergencies without seeking debt.
Reduce Debt: A budget assists individuals to lessen overspending and stay within their means, thereby removing exposure to credit facilities.
Reaching Financial Goals: the main objective of developing a budget is sticking to the budget enabling individuals to reach their short and long-term financial goals.
In a nutshell, budgeting is not meant for deprivation. However, it is essential to manage individual financials. Therefore rather than considering it as a punishment, look at the big picture by considering its essentiality in individual life and enjoy a financially secure future life as discussed above.
