Most young professionals, either salaried or self-employed, have certain financial aspirations and goals that they want to attain in the future. Some of these ambitions may be buying a home, building a retirement corpus, starting a new business, and so on. However, the real key to achieving these goals and spending a financially stress-free life in the future is to work on money management today judiciously as per Scott Tominaga. This is where budgeting comes to play a role by simplifying the purpose. At its core, budgeting is one of the best personal financial management tools that solidify the financial health of individuals.
Why Is Budgeting Important?
As a great personal finance management tool, budgeting enables individuals to keep track and control of their monthly expenses. This is how it develops a financial discipline in individuals to avoid spending more than their means, and equally grow a habit of saving. It’s the reality that many people fear budgeting because it seems restrictive, time-consuming, and overwhelming. They become afraid to confront the financial realities, to feel blamed for their past spending, and because it limits their freedom of spending. Budgeting is important for the following reasons.
- Preparing a budget helps individuals to allocate a certain percentage of their income for meeting their short and long-term goals such as saving for buying a home, paying off their debts, going on a vacation, and building a retirement fund. Thus, it helps them to be more focused on reaching their financial goals and accomplishing them.
- Another vital reason why budgeting is essential is that having it in place helps save money for emergency purposes for example medical emergencies, job loss and so on which may be experienced without any prior notice. Thus, it prepares people to get financial security and stay stress-free.
- Budgeting helps people to track and have control over debt in the best possible way, ensures that they prioritize debt repayment, and avoids falling into a debt trap.
- Budget preparation enables individuals to manage their finances better, and also know exactly, where their money goes as they have a proper plan in place. This not only lessens their financial stress but provides them peace of mind considering they are on the right track.
- Effective budgeting is the key to saving money and redirecting them to different investment options which eventually makes them wealthy and financially secure over time.
How to Prepare a Budget
The most common and popular personal finance management method is pursuing the 50-30-20 rule. The globally popular fiancé rule not only guides them to creating an effective budget but also suggests techniques for saving money. As per the rule, people need to divide their income into three categories.
- 50% for Needs—The rule suggests individuals allocate 50% of their income to pay for unavoidable necessities such as rent, utility bills, children’s school fees, groceries,
- 30% for Wants – it allows them to spend 30% of their income on entertainment and meeting their desires such as dining out, shopping, going on vacation, etc.
- Saving and Investment 20%: Make sure to keep apart at least 20% of total income for saving and investing. According to Scott Tominaga, it makes sense to invest in tax-exempt and tax-efficient investment funds like retirement funds like 401(k) plans, and Roth IRA apart from municipal bonds, life insurance plans, etc.
To conclude, it is essential to have an emergency corpus even before individuals begin investing. They should keep aside 3 to 6 months of their average expenses to grow the fund and must not use them unless it is an emergency.
