Lesson 1: What is a Budget?
A budget is a plan that allows you to control your spending and save for the future. Budgeting is the foundation of financial security because you won’t save anything if you’re spending too much. Making a budget is also a way of expressing your priorities in life. Is traveling to a new country every year important to you? Awesome! But you might need to cut down on your fashion purchases in order to afford those trips.
How to set up a budget
There’s nothing mysterious about making a budget. Simply come up with a number of spending categories, such as groceries, clothing, and dining out, target a spending limit for each category, and stick with your targets. Instead of plucking target numbers out of thin air, it can make sense to first track your spending for a few months and then look for areas where you might be able to trim. (We’re looking at you, takeout.) And you don’t need to be a spreadsheet whiz to get started—there are tons of free apps and websites that can track your spending for you.
Sample budget categories
- Housing
- Utilities
- Groceries
- Dining out
- Health care
- Clothing
- Savings
- Debt payments
- Transportation
- Leisure
Tips on budgeting for long-term goals
- Choose monthly or annual savings targets for each long-term goal on your horizon (such as retirement, a down payment on a house, or a wedding).
- Start a different account for each goal, and then set up automatic transfers to fund each account every month. If the money isn’t in your checking account, you can’t spend it.
- Make sure your savings targets are realistic. You’re more likely to stick with a long-term plan if it’s achievable.
- Reevaluate your savings targets annually and anytime you get a raise.
- Give yourself a pat on the back every time you meet a saving goal, even if you only saved a small amount. Saving is hard!
