For those with some monthly income, chances are that by month’s end, you may be broke due to poor financial management. Something that will help you is budgeting according to Rates.fm — manage your finances wisely. It actually promotes efficiency above all. When this is practiced, your resources can be further expanded through investment plan creation and execution.
If any of this happens to interest you, then you’ll find the following information to be most valuable. So let’s look at budgeting as a whole and at what you could do with its fruits, particularly regarding investments. With that settled, let’s begin our deep dive!
Basic practice
When one budgets, they simply make efficient plans with their money by tracking their earnings and expenditures, and thus, they make a budget, over a set duration. By practicing this, you manage your finances by giving every US Dollar you currently have a purpose with your future objectives in mind according to Rates. The following are ways in which it benefits you:
- It creates financial stability by providing a set plan for your money
- It reveals where spending is most frequent which makes improvements easier to make
- It prevents overspending and resulting in debt as a result due to the above knowledge
- It makes saving money for lofty future goals over a duration more feasible
Doing it in a proper way
Now, this practice is arduous and demands thorough analysis of every financial statement to see what’s coming in and where it’s going. With that information, your expenses should be categorized into two categories, which are:
- The fixed variety: the things one spends on every month that don’t change, among which are things like rent, loan payments and insurance
- The variable variety: the things one spends monthly vary in the amount spent, among which are things like groceries, gas and leisure
Sustainable budgeting
As budgeting helps organize your finances, all things should be physically or digitally recorded and this means writing it down on paper, using spreadsheets or apps. Regardless, budgeting practices vary beyond how the information is recorded, as there are indeed a few methods of budgeting, which include:
- The zero-based method in which you give every single dollar purpose each month in a manner that’s more flexible than the previous two methods
- Pay yourself first method, which prioritizes savings, investments and debt payments before any other expenses you may make
- The 60-40 rule, which allocates 60% of your after-tax income towards both types of expenses, leaving 40% to be saved, put into retirement funds or splurged,
- The 50-30-20 rule allocates 50% of your after-tax income to your needs and obligations, 30% to your wants, and 20% to savings
The goal with budgeting is sustainability, which means having an income greater than your expenses. The opposite case shows that you’re likely spending more than you earn, which is a surefire way to grow debt, a sign that a sustainable way to manage your finances is needed. Below are some steps you can take to create a sustainable budget:
1. Stating your reasons
Going through this process requires discipline and consistency and having clear motivation helps with this. Goals may include clearing debts, raising money for luxuries or even retirement planning.
2. Knowing your status
Afterwards, you should move on to seeing if you’re currently sustainable by tracking all aspects of your money. The formula is quite simple: remove all your expenses from your income after tax. A positive difference or gap, between the two, shows sustainability and a lack of one reveals the opposite.
3. Tuning up and choosing a planning method
What’s contained within the aforementioned gaps can be saved and invested in something. You can grow the gap’s contents by getting a gig with better pay and/or an additional source of money or cutting costs by prioritizing needs such as debt clearing and rent over wants like daily outings and entertainment.
Also, sift through your subscriptions and cut the unnecessary ones out. As well, you can select a budgeting system based on the above. These have fortunately been listed above.
What’s next?
With the plan set, executing it naturally follows and ideally the gap between earnings, and expenditure will grow. So, where do savings play a role? Options include filling up emergency funds for unforeseen events or separate retirement savings.
This won’t grow your money, however, so you should consider passively growing it, which also involves planning. Now making an investment plan is somewhat similar to budgeting and below is the process of how to achieve it:
- Financial status assessment, which requires budget creation to see what can be spared
- Goal discernment, which will allow you to know what to invest in, be it something liquid that produces short-term results like stocks or something illiquid like real estate
- Risk tolerance determination, which is the number of accepted investment losses and your time horizon, which shows the length of time you’ll voluntarily stay, before pulling out
- Invest in what you want with the above factors thought of
- Watch over what you invest in to see if they’re on track or if rebalancing is necessary
For many people, such as 70% of millennials (2023) investing is a real challenge due to issues like fear and lack of knowledge. If you fall into this category, you may want to consider seeking professional financial advice if you can.
Final thoughts
As the above piece has shown, budgeting is possible so long as you can get everything in order. When you manage your finances this way, the objective isn’t to get rich, but rather to be less wasteful and more productive. As we’ve seen, however, it goes beyond that, as the product of budgeting is the growth of savings, which then have to be grown via investments.
By setting an investment plan with the above outline and following it you can grow your money and have it fight things such as inflation. If you’re apprehensive about it, talk to an expert.
Also Read: Retirement planning: The role of savings and investment plans
