The principle of a budget constraint is one of the first things taught in a beginner’s microeconomics course. This principle stipulates that every consumer is faced with a budget constraint which shows the various combinations of different goods and services that can be purchased with the consumer’s available funds over a period of time. Thus, the rich as well as the poor are all living on a budget, but for some the pot is bigger while for others it’s smaller.
Still, when people say living on a budget, it is usually understood that this implies limited or tight budget. Understanding the trade-offs in a budget constraint is not useful only for beginner economists but also for everyone else – you can probably see that the aptness in how we handle our budgets is one of the main factors that determines in which category we find ourselves in. This is why it is worth learning how to set up a monthly budget and how to handle savings, expenses, taxes and loans. This is a basic education in personal finances that can be beneficial to anyone who puts time into learning it! So let’s begin with the basics of personal finances and living on a budget.
The basics of learning how to manage your personal finances well all revolve around creating and following a solid monthly budget. A budget is simply an estimate of how much money you have coming in and to which uses you want to allocate this money. In most cases, you will find that living on a budget is very hard only if you have created an unrealistic budget in the first place. The first step in improving your finances is to simply track your expenses in detail over a couple of months. At the end of each month, use a monthly budgeting tool (many of them are available online for free) to create a monthly budget after the fact. This is done simply for you to become aware of exactly where your money is going, and whether there are any inefficiencies or money leaks that you could eliminate.
The next step is to start preparing a monthly budget in advance for each month. This will make your spending deliberate rather than impulsive. From the previous step, you will already know what amount to budget for the most fundamental necessities like food, housing and utilities. If you are struggling to afford these things, then you can analyze your monthly budget to determine where it is best to make cutbacks and how big those cutbacks should be. In any case, it is important to remember that from this point on, you are living on a budget that is pre-determined with strategic intent and therefore it is absolutely crucial to stick to it consistently, or you will lose most of the benefits from making a budget in the first place. The most important benefits from having a budget are that you can be realistic with you shopping expectations, you can avoid frivolous spending, and you can begin an emergency fund and put away some savings. You are much more likely to do all of these things while you are living on a specific budget than if you just have the intent to save in the back of your mind, but you don’t actually make a real commitment to it.
While living on a budget, a great way to save some money is to dramatically reduce your housing expenses by finding a roommate to share your space with. This instantly reduces your expenses and allows you to put the money to better use. And, despite what you might think, finding a roommate is always a possibility for many different housing situations – nowadays a lot of people are looking for affordable housing while living on a budget.
Another thing you should look into is your expenditure of food. Here, your budget only tells half of the story – how much you spend on food and what kind of products you tend to buy. This half definitely has a lot of influence on your expenses – if you buy more finished products (like microwave food, or frozen dinner) you will spend more; if you buy more raw ingredients you will usually spend less. If you grow, fish and forage a lot of your food, you will spend even less! The other half of the story is how much of the food that you buy you actually end up eating and how much ends up discarded in the trash. Many people are wasting up to one fifth or more of the food they buy on a monthly basis. It’s usually spoiled cooked food or vegetables and fruits that went bad before they were used. This is precisely the kind of inefficiency that you should eliminate completely when you are living on a budget.