Developing a monthly budget is an essential way to gain control of your finances. A lack of proper budgeting creates opportunities to overspend, lose opportunities to save your money and gives you little understanding as to where all of the money goes at the end of the month.
Budgeting provides structure when it comes to making informed financial decisions with confidence. Financial stability is heavily dependent on financial awareness and disciplined money management as emphasized by organizations such as the Reserve Bank of India.
By creating a comprehensive financial budget and adhering to it, you will be able to avoid creating unnecessary debt, plan for unexpected expenses, develop a complete understanding of your income, expenses and save for the future. Creating a budget is not about limiting your lifestyle or enjoyment, it is about spending your money in a more intelligent manner such that you can meet your present needs, enjoy your life and prepare for your future without having to worry.
Major Benefits of Using A Budget
A well thought out budget provides organization and control over your personal spending habits. A budget allows you to plan for the future instead of reacting to past financial problems.
Having a budget reduces your financial anxiety, as you will know exactly how much you are permitted to spend and save at all times.
Importance of Financial Goals
Goals provide a reason to make a budget and keep you motivated while making a budget. According to experts at the National Payments Corporation of India, this type of financial planning is called goal-based financial planning.
If you have a clear goal to save for a new house, create a rainy-day fund, or take a family vacation, it will be much easier for you to budget and it will make much more sense to budget your money.
Understanding Your Income
Finding out how much you make on a monthly basis is one of the best ways you can create a budget. If you know what your income is, then you can come up with a budget that accurately reflects what your expenses are.
This is an important first step in the budgeting process because it provides you with a basis on which to build your entire budget. You can earn money in a variety of ways, for example, you could earn money through a job, freelance work, or side jobs.
Income Sources and Net Income
Examples of these would include jobs that you find on sites such as Upwork or that you perform outside of your full-time job. No matter where you make your money from, you need to include all sources of income when determining how much you actually make.
Net income is also a significant factor when creating a budget. Net income is the money you receive after taxes and other deductions.
Income Types To Include
Many people ignore other sources of income when putting together their budget, but many small amounts of income need to be included when putting together your budget in order to better understand your financial situation. Add any and all sources of additional income to your budget, including but not limited to, your salary, bonuses, part-time income, rental income, or any other form of regular incoming cash flow.
When you account for all income, you will lessen the chances of underestimating your spending power.
Importance of Tracking Your Income
By tracking your income, you will be less likely to overestimate your ability to spend to create a budget that is based off of an accurate record of your monthly income will create a budget that will be able to be sustained over a longer period of time. Accurately knowing what your income is will allow you to plan for all of your expenses, savings, and investments with greater ease.
Consequently, with greater clarity around the amount of income that you have available to you, you will have less financial stress, leading to improved financial decisions.
Tracking And Categorizing Your Expenses
After you have completed an understanding of the source of your income, which is the first step, your next step in creating a budget is to track, on a day-to-day basis, how much you are spending. Most individuals do not realize how much they are spending because they do not recognize some of the smaller amounts of items that they purchase regularly.
With the ability to keep an accurate record of your financial transactions, you will have a greater chance of identifying patterns while also identifying areas that could stand to improve.
Expense Tracking Methods
According to many financial professionals and apps like Mint, to gain awareness of where you’re spending your money you should keep an ongoing record of your expenses; this will help you to get better at budgeting and to be more accurate with your spending habits as you will have created a complete record of what has been spent in total.
When tracking your expenses, the method you use does not matter; it can be as simple as jotting down notes, using an excel-type spreadsheet, or using a mobile device to track your expenses, but whatever way you choose, it is necessary that you be consistent with your expense tracking because without complete expense records to reference to create an accurate budget; you cannot make accurate budgeting decisions.
Needs vs Wants
Another key part of budgeting is being able to determine if an item you are planning to purchase is a need or a want; needs are vital to survival and are essential expenditures while wants or wishes are lifestyle choices and similar to discretionary expenditures.
The Consumer Financial Protection Bureau describes how critical it is to know the difference between these terms in order to have a successful financial plan.
Examples of Needs and Wants
- Needs: housing – food – medical
- Needs: electricity (or other utility) bills – rent and mortgage
- Wants: entertainment – brand name items
- Wants: upgrading or making premium purchases
You will find that if you develop a reasonable budget that includes both needs and wants you will continue to stay within your budget for the long term.
Budgeting Methods
50% Rule & Zero-Based Budgeting is a common recommendation among financial professionals (see Forbes). Both are structured methods for allocating income.
50-30-20 Rule
- 50% – Needs
- 30% – Wants
- 20% – Savings
Zero-Based Budgeting
Zero-based budgeting is a method of budgeting where a specific dollar is budgeted for a purpose. This provides the highest level of control over your finances.
Saving and Emergency Planning
By saving a portion of your income each and every month, you will be better prepared for emergencies and additional future expense needs. Most experts, such as the State Bank of India, recommend that a family build an emergency reserve that covers at least 3 to 6 months worth of their living expenses.
Saving money should not be an afterthought or treated as a low priority when creating a budget. Savings should be considered and included in your budget in the same way that any other necessary expense would be considered when creating your budget.
Emergency Fund
An emergency fund will allow you to cover unexpected costs and will keep you from having to rely on borrowed funds to get you through the difficult time. To build your emergency fund, begin saving a small amount on a regular basis to get your emergency fund started.
Managing Debt Effectively
When not managed correctly, debt can become one of the largest hurdles to accomplishing your financial goals. Failing to address any debts will only increase the total amount of interest that you have to pay and will ultimately result in long-term financial hardship.
The banks or financial institutions you have a loan with (for example HDFC Bank) will normally recommend you to have a structured repayment plan to help you to effectively reduce your debt.
Debt Repayment Strategies
- Make high-interest debt payments a priority
- Make minimum payments on other debts
- Pay more than minimum when possible
- Never take on new unnecessary debt
Using Digital Budgeting Tools
A suitable automated budgeting application will have features that help to support your financial goals and can also aid in simplifying your financial routine. Features include expense tracking, category separation, bill reminders, and goal setting capabilities.
Using digital budgeting tools can provide you with immediate updates on your spending and give you real-time data on your spending. This will help you avoid overspending and improve accuracy.
Budgeting with Irregular Income
Many people do not earn a set salary on a monthly basis. Thus, freelancers, business owners and gig economy participants may receive money on an irregular basis.
It is a good idea to build your budget on your lowest expected monthly income rather than your highest expected monthly income. This ensures stability and reduces financial stress.
Steps for Irregular Income Budgeting
- Save additional income when you have good months
- Use excess income for required expenses
- Place excess income into an emergency fund
Common Budgeting Mistakes
Research Mistake 4: Ignoring Little Expenses While little expenses seem unimportant at the time, they accumulate into a large number that can negatively affect your financial strategy.
- Not maintaining accurate records of daily expenses
- Failing to track unplanned or unexpected expenses
- Not routinely reviewing your budget
Monthly Budget Review
The process of creating a budget is not a one-time event. Your finances change for many reasons such as changes in income, unplanned expenses, as well as changes in goals for each month.
According to budgeting experts at NerdWallet regular monthly reviews will improve the accuracy of the budgeting process and help you find patterns in your spending.
What to Review
- Remained within your budget
- Achieved your savings goals
- Effectively managed your debt
Building Financial Discipline
Disciplined financial behavior as mentioned by the Securities and Exchange Board of India provides you with a foundation for long-term financial stability.
- Daily Expense Tracking
- Saving Before Spending
- Not Making Impulse Purchases
- Regularly Reviewing Goals
Warren Buffet and many other successful people say that regular habits build wealth through consistent financial behaviors.
Conclusion
Your budget must change and grow with you. The reason punctuality becomes easy is that the budgeting process becomes a part of your lifestyle as opposed to just being another task that you do.
