Banking
If you want to gain control over your finances, you must master your spending—and that begins with establishing a budget. Discover how to create a budget, best practices for adhering to it, the latest budgeting tools available, and more.
Frequently Asked Questions
A budget will vary based on individual lifestyle, spending habits, and income. First, look closely at your financial situation by gathering all bills and income statements. Write down all your monthly expenses and income. Subtract the total expenses from your income. If the result is negative, it’s time to reassess your spending habits. Beginners can use budgeting tools like spreadsheets, calculators, or apps to help guide the process.
A personal budget is a financial plan that compares and tracks your income and expenses over a specified period, typically one month. It’s a roadmap for allocating money, helping you cover all costs, pay off debt, save for the future, and enjoy discretionary spending. Consistent budgeting can transform your financial situation and help you build wealth.
The amount of money you should have each month depends on your financial situation. Start by calculating your mandatory expenses and subtracting them from your income. The remainder is what you can budget for discretionary spending and savings. Various budgeting strategies can help you determine your spending limits, but the golden rule is to ensure your expenses do not exceed your income.
Every month, your spending will likely fall into three categories: fixed, variable, and discretionary. Fixed expenses, like rent or insurance, remain the same each month. Variable expenses, such as groceries, may fluctuate. Discretionary expenses are non-essential items, like dining out or entertainment.
The 50/30/20 rule is a simple budgeting strategy. Allocate 50% of your income to needs, 30% to wants, and 20% to financial goals like savings or debt repayment. This rule helps ensure that you’re covering essentials while still enjoying some discretionary spending and preparing for the future.
Creating a budget spreadsheet can be an effective way to manage your finances. Start by downloading a program like Microsoft Excel. List all your fixed and variable expenses alongside your income. Organise the data to track your spending and adjust as needed. If you prefer not to start from scratch, pre-made budget templates are available online.
Key Terms
An emergency fund is money for unexpected expenses, such as medical bills or car repairs. It provides financial security in times of need.
Collateral is something of value you offer to a lender as security for a loan. If you fail to repay the loan, the lender can claim your collateral.
A lien is a legal claim on someone else’s property, often used to secure a loan. It can complicate matters if the borrower defaults, but it also protects the lender’s interests.
A zero-based budget is one in which every dollar of income is allocated to expenses, savings, or debt repayment, resulting in a zero balance at the end of the month.
A debt elimination plan is a strategy to pay off debt systematically. It helps you stay motivated and focused on achieving financial freedom.
Net worth is the total value of your assets minus your liabilities. It represents your financial health and is a crucial indicator of wealth.
Financial assets are investments or properties with monetary value, such as stocks, bonds, or real estate.
Net income is your take-home pay after taxes and other deductions. It’s the amount you have available to spend and save.
Fixed expenses are recurring costs, like rent or mortgage payments, that remain the same each month.
Compounding is earning interest on both the initial principal and the accumulated interest, helping your savings grow faster.
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