By: Hong-An Phan
Understanding the balance between saving and spending.
There are many things that the rich have in common. For one, they have some affiliation with occupations with high salaries. Another could be having multiple sources of income along with their jobs. Yet one of the most prominent similarities among these individuals is their knowledge of personal finance and how strategically they use their money.
Budgeting is a surefire way to save up funds that can be invested, spent, or stored for emergencies. It is important to track your spending to understand which purchases you make are necessary and which aren’t. Differentiating between wants and needs is a habit that will lead to smarter spending and the accumulation of funds that can be used to fulfill long-term goals.
The first step to budgeting would be to divide up your salary into parts. One of the most popular strategies for doing so is the 50-30-20 rule where 50% of your salary is designated for needs, 30% for wants, and 20% for savings.
Purchases that can be considered ‘needs’ include rent, utilities, groceries, gas, or other bills presented in daily life. ‘Wants’ consists of spending money on items not necessarily needed to maintain a living. This could be buying games, trinkets, or additional clothing or makeup items that are unneeded. The final category, ‘savings’, is self-explanatory. It is the section designated towards emergency funds in case a ‘rainy day’ happens to roll in sometime in the future.
Alongside the division of your paycheck, it would be recommended to follow your money through tracking your expenses. By understanding your habits, you can see where you can cut down on unnecessary purchases. For example, set out a certain amount of money per week that is allotted for eating out. This could be a set budget of $200. If you exceed this price, watch to see which meals you could be saving money on by cooking at home as an alternative.
After achieving set budgeting goals, look into using the saved funds for alternate sources of income such as investing. This is a great way to add more financial freedom to your savings and enjoy more flexibility in goal maintenance.
Budgeting is an important skill to develop to increase financial literacy and quality of life. There is a safety net of always having access to a sizeable amount of money, which allows for stability and insurance. Budgeting is the first step to increasing your potential to make money and keep it.
Photo by Sincerely Media, Unsplash.
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