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Being a graduate of a prestigious university and making a considerable income does not guarantee your financial safety. According to Parkinson’s law of spending, which states that expenses rise to meet income, people’s expenses will always increase proportionally to their income. This law validates the idea that people do not end up poor only because of the absence of money but also because of a lack of financial literacy. 

Financial literacy is the effective knowledge and understanding of using financial products, such as savings accounts, investments, and insurance, and skills, such as budgeting and debt management, to manage money and save individuals from financial unaccountability, fraud, and scams. 

To be financially literate is to have an intricate understanding of how money behaves; by doing so, you have established a life-long profitable relationship with money. Most people don’t get financially trained in college, but thanks to “Effective Business Idea,” you are about to gain the power to control your finances with a free financial education. 

The most fundamental knowledge you must acquire when working towards financial independence is the skill of budgeting. Budgeting plays a vital role in ensuring adequate money inflow and outflow, helping to increase accountability and prudence.  

What is a budget?

A budget is a planned estimate of anticipated income and expenditures for a certain period in the future, and it is created and reevaluated regularly. Everyone, from individuals to families of varying means, as well as governments and corporations, may benefit from developing and sticking to a budget.

Budgeting helps you control your monthly spending, prepare for the unexpected(rainy days), and buy luxury goods and properties without debt. Keeping a budget can be a smooth process; it doesn’t restrict you from buying what you want, but rather, it gives you the freedom to maintain a grip on your finances and a clearer picture of where your money is going.

Introduction to Budgeting

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Steps to set up a budget

Itemise your total income stream

Your income streams are the channels through which money flows directly or indirectly into your account. These should include paychecks, tips, Social Security, or investment income. Recognising these streams will help you know the total amount of money you can plan with and give you an idea of what is obtainable. 

Monitor your expenditure

Keep a record of everything you spend,  be it a credit card expense or cash; this will help you recognise what you spend the most on that month. This does not exclude spending from automatic payments and subscriptions.  

It is better to do this at least monthly so that you can quickly correct any financial mistakes you are already making. These could include overspending, not saving enough, or not prioritising debt repayments. You do not want to do something that makes you regret the whole year. 

Tracking your spending can be done in several ways, ranging from using a spreadsheet to mobile applications like Wave and Freshbooks, which can change the trajectory of your finances.  

Other desktop software- YNAB, Quicken and Mint 

Establish financial goals

The path to financial independence is sacrificial because it means you will say no! However, this path is, in the long run, rewarding and satisfying. The hope of making it through this journey is hinged mainly on the goals you have created and whether they improve your confidence and esteem. Paying off a long-standing debt is not just a relief, it’s a reward that brings peace of mind and a sense of security. 

Note – Just ensure your goals are SMART

Here are a few tips that will help you in organising your spending: 

You should divide your income into four parts, which are 

1. Mandatory expenses

These are monthly expenses you must pay to be able to run a life. They include rent (for yourself, family, or business), insurance fees, income taxes and relevant bills, and childcare. These are the expenses that are necessary for your basic needs and obligations. 

2. Debt repayments 

If you are paying off debts, such as student loans or a credit card bill, you had incurred before you started your journey to financial freedom, then begin to take another convenient portion of your income and pay back your debts. 

Note – Ensure you pay your debt after settling mandatory expenses so you do not have to borrow again. 

3. Savings

You only run on the same spot without saving some of your earnings. Savings for most people is the fundamental way to raise funds, which can now be invested into other income streams to increase your financial capacity. Save at least a tenth of your income so that by the time the year is almost wrapping up, you will have a month’s salary at your disposal. 

We recommend you read “Rich Dad, Poor Dad by Robert Kiyosaki”. Also read “The Richest Man in Babylon”.

Savings as a part of budgeting

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4. Every other thing

After doing the three above, you can spend what you have left on every other judicious thing you need to buy for yourself, especially your loved ones.

Because this is not a straight road, and things sometimes turn out differently, you will want to be flexible and make adjustments where necessary. Observe your spending and goals each month. Reevaluate and adjust where you assign your discretionary spending. A budget does not have to be rigid; a flexible one will help you avoid overspending.