Budgeting & Savings
The best high-tech and low-tech strategies and tools for managing your money. Learn how much to save, which apps to use, which debts to focus on, how well you're doing for your age.
Budgeting & Savings
What is the difference between budgeting and savings?
Budgeting is the act of putting together a budget, which is an estimate of your revenue and expected expenses for a given time period. Savings refers to the money left over after your expenses are subtracted from your revenue, also within a specific time period. By creating a budget, you may be able to locate and cut any unnecessary expenditures, thereby increasing your savings.Learn More: 8 Financial Tips for Young Adults
Why are budgeting and savings important?
By keeping tabs on your expenses and giving yourself a plan to follow, budgeting makes it easier to meet your financial goals. Savings, meanwhile, are important because living paycheck to paycheck isn’t viable in the long-term. If you are unable to accumulate savings, you could be in serious financial trouble in the event of an unexpected expense, such as a large medical bill.Learn More: Calculate Your Debt-to-Income Ratio
What is a good way to budget?
The first step to budgeting is determining your net income (i.e., your total salary minus taxes and employer-provided programs) for a given time period. The next step is to figure out your fixed and variable expenses for the same period of time. You can then either decide how to utilize any surplus funds or find ways to reduce your expenses if they exceed your income. There are several budgeting plans available that can help you allocate an appropriate amount of money to each type of expense.Learn More: Five Rules to Improve Your Financial Health
What is the 50/30/20 rule?
The 50/30/20 rule is a budgeting technique that was created by Senator Elizabeth Warren. The idea is that people will be able to more easily achieve greater financial stability by dividing specific shares of their spending between distinct categories. The three categories of the 50/30/20 rule are: 50% allocated to needs (i.e., rent, healthcare, etc.), 30% to wants (i.e., travel, entertainment, etc.), and 20% toward savings/debt (i.e., retirement, student loan payments, etc.).Learn More: Average Savings by Age
Discretionary income refers to a portion of an individual’s income that can be spent, invested, or saved after paying for personal necessities and taxes. In this context of discretionary income, “spending” is specifically for nonessential goods and services, such as jewelry or entertainment. Although credit cards can usually be used to purchase nonessential goods and services, accruing personal debt isn’t the same thing as having a discretionary income.
A budget is an estimate of what a person earns and spends within a specific time period (i.e., monthly, etc.). Budgets are useful tools for giving you a clearer picture of your finances and helping you identify any unnecessary or excessive expenditures. A budget also makes it easier to determine the timeline for long-term saving goals by calculating how much surplus savings you would have after a certain amount of time.
Savings refers to an amount of money remaining from an individual or household’s disposable income after paying all of their expenses and obligations for a specific time period (i.e., monthly, etc.). Savings includes both cash as well as cash equivalents, such as bank account holdings. Although savings can be put toward many different long-term life goals, it’s also crucial to have enough saved up for emergencies.
Financial health refers to the current state of a person’s monetary assets and liabilities. Although each person's financial circumstances are different, there are rough guidelines that can be used to measure anyone’s financial health. A financially healthy individual may have a steady flow of income, consistent expenses, and regularly increasing savings.
An inflexible expense is a recurring expense that typically cannot be altered or eliminated. Inflexible expenses are often set at a fixed amount and payment schedule, such as a monthly rent payment. In addition to current sources of income, lenders closely examine monthly expenses when considering applicants for personal loans, mortgages, or auto loans.
Quality of Life
Quality of life refers to a non-financial measurement generally associated with job and life satisfaction. A person’s quality of life is highly subjective to their personal experience, though it is often tied to financial security (among other factors). The potential tradeoff between money and quality of life is typically taken into account when considering things like a career or a personal savings plan.
Showrooming is the act of visiting brick-and-mortar retailers in order to see products in person before buying them online for a cheaper price. This practice allows customers to try out an item before making a decision to buy it while also finding the best price, which also gives an edge to online retailers. Brick-and-mortar stores have used multiple different marketing tactics to combat showrooming.
Average Propensity to Consume
The average propensity to consume (APC) is a measurement of how much of an individual’s income is spent rather than saved. The APC is calculated by dividing average household consumption (i.e., spending) by average household income (i.e., earnings). On a broader economic level, a high APC can be a sign of a healthy economy, since consumer spending drives economic growth.
50/30/20. "Income + Financial Stability in America." URL: http://fiftythirtytwenty.com/