Everyone has needs and wants. It could be a new set of curtains for the living room, an Xbox One video game console, or a trip to Disney World in Florida. All these things cost money, and if you want them, you have to budget money.
We all know that money equals currency, which is the national legal tender in a country. It can be coins or bills, but typically currency is banknotes (paper money) issued by your government with the face of an influential historical figure or famous political leader on it. For example, most modern currencies use the portrait of the current head of state, although that’s not a requirement.
To budget money, you have first to work out how much money you have available and what your needs and wants are. A common way of doing this is by using the 80/20 rule of budgeting. This means that 20% of the things you want will cost 80% of your money, and another 20% of what you want will cost the other 80%.
Here’s an example. Let’s say that you have $100, and your needs are $20, and your wants are $80. Your needed expenses will be things like rent, electricity, and food. Your wants are nice-to-haves which you can live without, but would rather have them than not. These include items such as a new phone or games to play on your Xbox.
If you want the PlayStation console at $80, you’ll only be able to buy the curtains you need at $20. This is how the 80/20 rule works.
As you can see, there’s no use in having more money than what you need; it doesn’t matter if you have $200 or $1 million if your needs are met at $20. It will all get used up anyway, and you won’t even remember what you did with it.
You should also be careful about using credit cards for purchases, which can cause serious financial problems down the line. If your needs are $20 and your wants are $80, but you’re using a credit card that has an introductory rate of 0% for six months, you might think it’s a good idea to buy the PlayStation for $80 and pay off the credit card at $0 interest in 6 months when your introductory rate runs out.
However, to buy the PlayStation, you’ll need to borrow money from your credit card company, even if it’s just for a couple of days while the retailer waits for the funds to clear. That means you’ll get charged interest on the full $80, which is more than if you were paying cash – there are no introductory rates with money!
It’s also common for people to buy new items on credit and then sell them back to the retailer when they’re done using them so that they can pay off the credit card. For example, if your needs are $20 and your wants are $80, you’ll need to borrow the money from a credit card company to buy that PlayStation at $80. You can then sell it back to the retailer for less than what you paid for it so that you can pay off your credit card.
In this situation, it’d be better not to buy the PlayStation at all or get a cheap one for $20. Not only will you save money on interest by buying cash, but selling back an expensive item like that won’t earn you much; you’re better off just saving up the total price of something if you have enough time.
In addition to the 80/20 rule, you might also want to use another method of budgeting called paying yourself first. This is where you put a certain amount of money into your savings account or another account (usually around 10%) before paying bills and other financial obligations.
For example, if your needs are $20 and your wants are $80, you should determine how much you have available to spend. If the answer is $100, put $20 in your savings account before paying bills or other expenses so that when it comes time to pay them, there’s only $80 leftover. Even though you’ll be missing out on those wants, you’ll have more money in the long run since you’re taking care of your future self rather than spending all your cash at once.
You can also pay yourself first with a different strategy called forced savings. With this method, instead of spending all your bills as soon as they arrive, you save money before paying them. For example, if your needs are $20 and your wants are $80, you could set up an automatic transfer of $100 from your bank to a high-interest savings account and then wait until the next day before paying bills. If, at first, it feels like you’ll miss out on those wants, don’t forget about them; after all, they’re only wants!
Don’t be afraid to sacrifice some of those wants to save money. It’s also important to remember that budgeting is about spending money on what you need and cutting back on what you don’t. If your needs are $20 and your wants are $80, you’ll need to cut out some of those wants if you want to be able to save money! Even simply waiting until tomorrow before spending that cash will give it time to grow in your savings account!
Don’t forget that budgeting is also about saving money for the future! If you don’t have any savings, hold off on buying things until you do so that your money works harder for you.
Save some of what you earn by setting up an automatic transfer from your bank to a high-interest savings account each month. This will give your money time to grow, meaning that you might even be able to buy the PlayStation at that point!
Conclusion
Once you start budgeting, it’ll probably feel like there’s never enough money. However, if you’re careful with your spending and save money each month (instead of paying off all your bills), you’ll eventually earn enough interest to make up for the lack of buying power.
Remember that budgeting is about understanding how much money you have and spending it well. If you don’t know how much money you have, all your budgeting efforts will be in vain!
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