Why do I need to make the budget?
When I was creating my first budget several years ago, I knew roughly how much money I was making monthly, but I had never drilled down my expenses by category to figure out what I could pay for a recurring basis, or how much money I could save on a regular basis. You will not recognise your spending behaviours and where your rupee goings till you creates your budget. If you certainly not budgeted previously, the idea can be scary.
Some people are scared that budgeting will cramp their standard of living. In fact, the opposite is right: having a budget is the assured way to stay on the top of your finance and experience the financial freedom.
Budgeting is all about management of own finance so that you can focus your incomes on the things that matter. In short, I was spending my earnings on the things I needed and wanted without determining first whether I could truly afford them because of the lack of a working budget; finally I created one budget for my family.
Who should make Budget?
Any person or family that earns and spend money must have a budget, without looking at your income, it does not matter what your income level is; low, high or in between, budgeting is your utmost important key to achieve financial freedom in your life. Because in financial planning, how much you spend is more important rather than how big salary cheque you are drawing. If you are investing in the stock market or Mutual Fund, you must be aware of Budget, balance sheet etc.
Will you invest your money in business having no budget or Future Goal?
Why is personal budget so important and beneficial in Money Management?
- It helps you to gain control over your money and maximise your use of earning.
- It helps to keep track of your spending.
- It helps to Plan and realize your short and long-term goals.
What are your future goal and targets?
The mistakes made initially in the life can have lifelong consequences and may lead to very costly “must-fix” circumstances down the road. One of the best ways to begin good habits and a good beginning to your financial life is to assess your expenditure and create a budget.
A well-crafted budget will offer exhaustive insights into your present financial situation. It will help you to recognise where your money is going, what your expenses and future commitments are and confidently track your progress towards to reach your goals. Developing a budget that you can maintain over the longer term has been finally linked to building wealth, while at the same time facilitating you to get out of debt and cut expenditures.
Budgeting is a very simple workout. We need to assess our income, list our expenses and saving needs and then make sure we cut back on our expenditures to accomplish it within the present income. A good Budget will help you to arrange, plan and prioritize to create a future roadmap, it will indirectly put a control on your overspending and help you to achieve your goals.
A budget is a finance plan that distributes future income towards expenses, savings and loan (Debt) repayment. Historical (Last 3 years) spending and overall debts are considered during creating a family budget. No matter whatever your future financial goals are, being able to budget exceptionally is the key to accomplishing them.
Generating a personal financial plan should be simple enough so that a second standard student, who knows addition, subtraction, multiplication and division, can finally understand it. No matter what your financial goals are, being able to distribute your expenses into the budget brilliantly is the key to achieving them.
Read How to Analyse your Income and Expense to understand about the categorisation of expenses.
How I can prepare my budget and how to keep track?
The simplest and most effective way to track your spending, especially your cash purchases, is the low-tech way, with a diary and a pen. By carrying around the pocket diary with you, you can track exactly where every rupee is going–for a tea or cigarette on your way to the office to a spending splurge at the shopping mall on weekends.
If you would prefer, on a daily or weekly basis, fortnightly add these expenses into excel sheet alternatively if you are using a smartphone, just download budget tracking application in your mobile and start adding your expenses this will help to the people who are complaining about they do not have time to write, your mobile is handy tool now to manage expenses.
Every week spends a half hour to check your credit and debit card statements online and add every expense based on their category. Remember, you are working eight hours every day to earn, to save your earnings you must invest your half hour to read various personal finance sites, blog, newspapers etc., learn, understand and plan accordingly to enrich your financial life.
After tracking your budget, you may notice some areas where you will have to make some modifications. Don’t just elevate your budget without considering substitutes. While you may have no choice, if prices or expenditures go up, search for better deals before giving in to the extra expenses. Try to shop online from various e-commerce portals where most of the products are available at a discounted price than the local shop near your home or office.
What Should You Be Spending? Prioritizing wants over needs
Most of us when think about budgeting, we think of the basic needs like EMI payment/rent, Food and basic utilities, after this we directly jump to “how much I can spend on new electronic gadgets or vacation trip?” often our mind trick us to prioritize want over the needs. Read about Maslow’s hierarchy of needs which Proposes a linear progress through physiological requirements, safety, love and belonging, and esteem to self-actualization.
As per this organise universal human needs in order of priority; with the most fundamental ones at the base. When you climb up through four levels from the base of the pyramid you have the freedom to reach at your full potential. Making a budget with hierarchy does not allow you to pick and choose from each level at random.
Even if you fulfil your physiological and safety needs, you cannot jump to self –actualization. Things in that category are often more expensive and less essential in everyday life. Bend the Rules Only if a Purchase Relates to Your Basic Needs.
True wealth isn’t about stuff; it’s about maintaining the freedom to do what you want with your life.
Percentage budgeting is a simple and direct concept. As a replacement for of allocating fixed amounts to every line item, you begin with a target percentage for each expenditure category. This process can show you where you need to consider cutting back and where you may be able to afford to spend a slightly more.
Here are some budget percentage guidelines to consider. Remember, these are after-tax amounts and categories may change based on life stage, lots of personal fine-tuning, and that flexibility is one of the benefits of the percentage method:
- Saving: 30%
- Housing (Consider rent/Home loan EMI): 30%
- Food (groceries and dining): 15%
- Personal care (including clothing): 3%
- Healthcare: 2%
- Loan repayment (Car or Personal): 7%
- Utilities: 6%
- Entertainment: 2%
- Insurance (Life/non-Life): 5%
After rigorously following category based budgeting, start adding line items in each category and start allocating amount and Put your budget into action. Start by adding 5 line items every month, so by the end of the year your complete budget sheet will be ready with spending history. This way you can create complete excel sheet for next year budgeting. Next step is to find simple ways to save money, plan to reach your saving goal and work out how to manage with low income.
What is your minimum monthly budget requirement? How much you need to live in rainy days?
If you are struggling to save money, look at your budget and find ways to cut back on the extras. Try to budget a clear-cut amount for fun, leisure and personal expenditures, but don’t make your budget so much tighter that you feel incapable to stick to it.
Find a System that Works for You
It’s a decent idea to repeat your budget every 3 to 6 months to make sure it reflects your current income, spending and what you want to attain. Once you are happy with using and sticking to a budget, you can update it less frequently, like once a year. You will probably also want to recreate your budget when there are significant changes to your income or expenses, like getting or resigning from a job, buying or selling a car or a house, the extra cost of expanding your family or managing illness of family members.
Finally, using the right mechanism can make budgeting more effective and happily. There is no single best budgeting application available. Everyone has a different budgeting style and a method of tracking their money. What works best for one person might not work best for you; if your method works for you, use it.
Yet, there are several really good budgeting tools that link directly to your bank account and credit cards to automatically download and categorize transactions like My Universe or Perfios. Both also come with smartphone and tablet apps, and they provide a clear picture into how and where money is being spent.
- Always keep in mind that the goal of budgeting is to spend less than current income (i.e., to save money). One of best ways to do this is to save first. Rather than saving what is left over at the end of the month, save first and spend the rest. This strategy takes advantage of behavioural finance. By getting money out of your account and into savings first, we are less likely to spend our savings during the month.
- If you have money left over (a surplus), the best way to save is to move money into a planned goal as soon as you are getting a pay cheque and before you get the chance to use it. When you receive a pay rise, bonus, special payment or tax refund move that money straight into your goal to give it a boost
- Resist impulse buys, control your emotions and concentrate on need first rather than on wants.
- Budgeting helps you to identify and eliminate unnecessary spending like late payment fees, penalties and interest cost, cutting this cost enables you to produce extra money.
- Taking a loan is not necessarily a bad thing if you can afford it to payback or if the debt is necessary, your budget will help you to understand how much debt you can afford in a realistic way without being stressed.
- After making a budget you will get an overview of your financial health, this will help you to see potential money problem in advance, and be able to make require adjustment before the problem arise.
If you don’t have a budget, today is the time to make one. By following the above 6 Secrets To Create a Successful Budget; you will be on your way to financial freedom and building wealth for the future.