• Kavya Ravikanti

Back to the Basics: Breaking Down Budgets

Budgeting. It’s often the first step towards figuring out how to manage your money. However let’s be honest, the word budget is a bore and budgeting sounds like a total snoozefest. So moving forward, I’m going to refer to a budget as an empowerment device or simply an Ed. Unlike a budget, Ed is chill. They are encouraging and insightful. We stan Eds.

The Why

So you may ask, why do I need an Ed? Depending on where you are on your financial journey you may or may not need one. I personally believe that they are super helpful when you are starting out to help you figure out where you want to go. Personal finance is personal. Everyone’s goals are going to be different but creating an Ed can help you determine your goals and help you figure out the next steps. Personally, my Ed has helped me make sure I hit my savings goals.

The How

Let’s get started. There are multiple ways to make an Ed and there no one right way. Pick the one that makes the most sense for you. Again, it all goes back to your own goal.

Step 1: Understand your numbers

There are two major categories you want to bucket all your numbers in. Cash Flow and Expenses. Your cash flow is all the money coming in during a certain period of time. Expenses are all the ways your money is being spent during a certain period of time. Most people will create an Ed based on monthly expenses, but as a college student, doing it around the semester might make more sense for you. Cash Flow: Income from your jobs or internships, allowances from your parents, grant or scholarship money, etc. Expenses: EVERYTHING you are paying for. The more you can track down and account for, the more helpful your Ed will be. Look through your credit card, debit card statements, and account for tuition, rent, etc if those apply for you. Ideally, your expenses for the period of time you chose are lower than your cash flow. However, if this isn’t the case don’t worry! You are on the path to figuring this out and if you went through Step 1, you are already better off than 61% of U.S adults who don’t have an Ed.

Step 2: Pick the Process That Works For You

This is the fun part. There are a number of ways to format your Ed. I’ve highlighted a few here, but play around with the system that aligns with your lifestyle the best!

Big Wins First For this Ed, set aside money for your savings, debts, and major expenses first. This could be your retirement savings, investment savings, loan payments, rent, tuition, etc. Once you side aside money for these, anything left is free for you to use however you want. Here’s an example:

This one is great if you want to focus on making sure you don’t miss the expenses you can’t avoid and to make sure you hit your savings/debt payment goals. You can play around with percentages or fixed amounts for each category.

Zero it Out Total up your cash flow. Then list out all of your expenses and play around with the numbers till your expenses match your cash flow. Here’s an example:

This one is great if you want to assign a job for each dollar you have and if you want a more strict process to hold you accountable. Adjust the numbers till you find the one that works best for you. Account for expenses you must factor in such as rent, tuition, etc first and then tackle the discretionary categories next.

50/30/20 This is a straight forward framework that many people use to simplify their process. For this Ed, break down your expenses into 3 main categories: 50% for the necessities (tuition, rent, etc.), 30% for discretionary expenses, and 20% for savings and debt payments.

Here’s an example:

This one is great is if you want something super easy to start out with. If 20% of your cash flow won’t cover your savings and debts, feel free to play around with the 50/30/20 split. These numbers are merely a starting point and not necessarily a rule.

Values-Based Approach This is the way Sneha tackle’s her Ed in this week’s MoneyStory. Instead of coming up with categories for your expenses that are as simple as Food, Entertainment, Rent, etc., create categories that match your values. The idea here is that how you spend your money reveals a lot about you and so ideally your spending should reflect your personal values. In Sneha’s example, food falls under both the Personal and Relationship categories. Food under her Personal category is focused around meal prepping and eating healthy, while food under her Relationships category is for eating out with friends and family. Here’s an example:

This method definitely requires a larger investment of time upfront. However, it could lead to an Ed that might actually be more sustainable in the long run.

Step 3: Check-In and Refine

Unfortunately, creating an Ed isn’t going to lead to overnight money management success, but it is a huge step in the right direction. Once you pick a process that works for you, check in on it. Start out with weekly check-ins to see how you’ve been doing and tweak your Ed if it hasn’t been working for you. Don’t be afraid to pick a completely different process or play around with your numbers.

That’s it folks! Just 3 steps to get started with creating your own Ed. Check out these super simple templates here. If you have a process that works well for you, I’d love to hear about it — email me at kavyasrir1998@gmail.com.

Disclaimer: The content on Young, Not Broke is for informational and educational purposes only and should not be construed as professional financial advice. Should you need such advice, consult a licensed financial or tax advisor.

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