what should be considered when setting a budget everfi

2 min read 08-12-2024

what should be considered when setting a budget everfi

Creating a budget is a crucial life skill. This guide, inspired by EverFi's financial literacy modules, will walk you through the key factors to consider when setting a realistic and effective budget. Mastering budgeting empowers you to achieve financial goals, from saving for a down payment to paying off debt.

1. Understanding Your Income

Before diving into expenses, you must know your income. This is your starting point.

Income Sources

Regular Income: This includes your salary, wages, or any consistent income source. Be precise; use your net income (after taxes) rather than gross.
Occasional Income: This encompasses side hustles, freelance work, or occasional bonuses. Factor these in, but don't rely on them for essential expenses.
Government Assistance: If applicable, include any government benefits or financial aid.

2. Tracking Your Expenses

Accurately tracking spending is vital. Many budgeting apps and spreadsheets can help.

Categorizing Expenses

Needs: These are essential expenses like rent/mortgage, utilities, groceries, transportation, and healthcare. These should be prioritized.
Wants: These are discretionary expenses such as entertainment, dining out, subscriptions, and shopping. These are flexible and can be adjusted.
Debt Payments: Include loan payments (student loans, car loans, credit cards) and any other debts. Prioritize high-interest debt.

3. Creating Your Budget

Once you've tracked your expenses for a month or two, you can create your budget. Several methods exist:

Budgeting Methods

50/30/20 Rule: Allocate 50% of your income to needs, 30% to wants, and 20% to savings and debt repayment. This provides a simple framework.
Zero-Based Budgeting: Assign every dollar of your income to a specific category, ensuring your income equals your expenses. This promotes mindful spending.
Envelope System: Allocate cash to different spending categories in envelopes. Once the cash is gone, you can't spend more. This method enhances physical awareness of spending.

4. Setting Realistic Goals

Don't create an unrealistic budget you can't maintain. Start small and adjust as needed.

Financial Goals

Short-Term Goals: These might be saving for a vacation or paying off a small debt. Set achievable milestones.
Long-Term Goals: These include larger goals like buying a house, funding retirement, or paying off student loans. Create a plan to reach them gradually.

5. Regularly Reviewing and Adjusting

Your budget isn't set in stone. Regularly review and adjust it to reflect changes in your income or expenses.

Monitoring Progress

Monthly Review: Analyze your spending against your budget. Identify areas where you're overspending or underspending. Adjust categories if necessary.
Annual Review: Conduct a thorough review annually. Re-evaluate your goals and make adjustments based on your progress and any life changes.

6. Utilizing Budgeting Tools

Many tools can make budgeting easier and more effective.

Helpful Resources

Budgeting Apps: Mint, YNAB (You Need A Budget), Personal Capital offer automated tracking and analysis.
Spreadsheets: Excel or Google Sheets allow for customizable budgeting.
Financial Advisors: Consider consulting a financial advisor for personalized guidance, especially if you have complex financial situations.

Conclusion

Setting a budget isn't about restriction; it's about control. By thoughtfully considering your income, expenses, goals, and utilizing helpful tools, you can create a budget that empowers you to achieve your financial aspirations. Remember, consistency and regular review are key to successful budgeting – a vital skill emphasized by EverFi and essential for a secure financial future.