Budgeting Basics

 
 

Pheng Lee has been working with Hired for over 3 years as a Financial Coach, providing financial workshops as well as coaching, helping people to set and reach their financial goals. Continue reading below to learn about Pheng’s basics of building a budget.

Pheng Lee Hired Financial Coach

A budget is simple tool that anyone can and should be using to help manage their finances effectively. This is one of the most basic concepts that we cover in Hired’s Financial Wellness sessions, and I consider it an important building block towards reaching financial goals.

What is a budget?

Before creating a budget, it’s important to understand what a budget really is. A budget can be described as a summary of your planned expenses compared to your planned income. Think of a budget like your game plan for financial success. The purpose of a budget is to help you accumulate savings and avoid unnecessary or unplanned debt, and to help you reach your financial goal(s).

There are four main elements to think about when creating your budget:

  1. Time

    How long do you want to have this budget plan? (i.e. one month, six months, one year)

  2. Surplus/shortfall

    Your surplus is any amount of money left over after expenses/bills are all paid, while a shortfall is a deficit, meaning you don’t have enough money to cover all your expenses.

  3. Income

    The money that you receive. Income can include:

    • Earned income (from your work)

    • Public benefits

    • Investments/interest earned

    • Other income/benefits

  4. Expense

    This is the cost required for something, or money spent on something. Common expenses include rent or mortgage, groceries, car payments, and utility bills like gas, electric, and water. There are five different kinds of expenses:

    • Fixed expenses: Does not change from one payment to the next.

    • Variable expenses: Amount can change from payment to payment (i.e. groceries or gas).

    • Periodic expenses: Certain things that you must buy from time to time (i.e. oil changes, haircuts).

    • Needs expenses: What you must have to live.

    • Wants expenses: Things you desire and can live without.

Why is creating a budget important?

A budget allows you to create a spending plan for your money and ensures that you will always have enough money for the things you need and the things that are important to you.

Here are a few savings guidelines to think about depending on your income and expenses:

  1. 50/30/20

    • 50%: Spend up to 50% of your after-tax income on needs and obligations.

    • 30%: Spend up to 30% of your after-tax income on wants.

    • 20%: Spend up to 20% of your after-tax income on savings.

  2. 70/20/10

    • 70%: Spend up to 70% of your after-tax income on needs and obligations.

    • 20%: Spend up to 20% of your after-tax income on wants.

    • 10%: Spend up to 10% of your after-tax income on savings.

  3. 80/20

    • 80%: Spend up to 80% of your after-tax income on all your expenses.

    • 20%: Spend up to 20% of your after-tax income on savings.

Creating a budget is the first step towards financial wellness, and by understanding the basics, you can set yourself up for success. I hope these tips will help you lay out a basic framework that will get you budgeting in no time!

 
Information @hired