September 6, 2021

Budgeting 101: How To Set Up Your First Budget

Everything you need to know about what a budget is, and more importantly how to set up your very first budget using one of the industry's most tried and true methods.

14 min read

Qoins Staff

@qoinsapp

Budgeting involves making a clear plan on how to spend and save the money you earn. When you work hard and earn money, it is important to manage your money prudently. A budget helps you do that. A budget is a plan that lists out all the incomes that you earn. It also has projections for all your expenses and savings. If you have created a budget, then it is the first step to good financial management. Don’t worry if you haven’t made a budget, we will tell you how to do it.

 

Budgeting – basic concepts

Certain basic concepts related to budget needs to be understood before proceeding further:

 

  • Income: This refers to your earnings. It can be through salary, business, or any other active income you earn. It also refers to passive income earned from interest, rental income, and any other source.
  • Expenses: This refers to the money that you spend. These are further classified as:
  • Needs: Needs are the essential expenses that you have to spend on. Includes grocery, transport, utilities, insurance, repayment of loans, clothing, etc.
  • Wants: These are your desires for goods and services that you may not need but want to enjoy. It includes vacations, eating out, fashion, purchasing new goods, etc.
  • Savings: This refers to the money you save for the future.
  • Debt repayment: This refers to money spent on clearing debts that you owe. The debts include student loans, home loans, auto loans, credit card bills, personal loans, etc.
  • Emergency fund: This is a sum of money kept aside to manage any emergency situation. Usually, you need to have three to six months of living expenses as an emergency fund.

 

How to Budget?

The first thing you need to do while budgeting is to make a list of all your incomes and expenses. List out all your sources of earnings and all expenses that you normally spend on or expect to spend on. A budget is ideally prepared for a year. You can also make a budget for each quarter or even for each month. Numbers in the budget are not 100% accurate. A budget is an estimation. It is possible that you may spend a little more or a little less. The idea is to have a plan on hand so you manage your money in a more effective way.

 

One of the best and practical ways to make a budget is to follow the 50:30:20 principle. This is a popular budgeting technique and simple to follow:

 

  • 50% of your income should be to meet all your needs.
  • 30% of your income should be spent on wants.
  • 20% of your income must be saved.
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Budgeting for a household with a take home pay (post-tax) of 80k per year.  To help you understand how budgeting works, here’s an example of a household earning $80,000 per year.

 

$80,000 per year translates to $6,666 per month. Going by the 50:30:20 principle, here is how it looks like:

 

INCOME: 6,666

 

EXPENSES

Needs

Rental or expenses on mortgage = 1133

Transport (Fuel, auto loan, etc.) = 500

Groceries and food = 500

Student debt = 400

Utilities = 450

Insurance = 350

 

Wants

Dining out, mall visits, etc. = 400

Entertainment = 350

Children's expense = 275

Holidays and gifts = 185

Clothing = 150

Subscriptions = 200

Miscellaneous = 279.80

 

Savings

Retirement account = 800

Investments = 333.20

Other savings = 200

 

Total expenses = Needs + Wants + Savings = 3333 + 1999.80 + 1333.20 = 6666

 

The above is an illustrative budget for a young married couple with small kids. The budget would change with time. There would probably be home loans and other expenses in the future. Budgeting for college is another area that needs to be looked into. This would call for increased savings. However, as one advances in their career, they would earn a higher income, which should support increased savings.

 

The above is an example of a balanced budget. In practice, it is possible that a person’s expenses could be more than their earnings or not leave enough for savings. In such a situation, one needs to look at other sources of income like part-time work, home business, etc. The other option is to make sacrifices by drastically cutting down on wants to balance the budget.

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