From the moment one asks for their first monthly allowance, an education in money management begins that for some can be over in the initial years, and for others, can stretch into a lifelong lesson.
Needs, wants, prices and crises are the four things that define the way we spend our hard-earned cash in our life. Two of these things – prices and crises – we cannot have any control over. Needs and wants are still manageable. And this management is called budgeting.
Easy as it might seem, budgeting is a skill hardly many of us master. It involves a ton of planning and spadework, but the results can be promising.
If you’ve never given any thought to budgeting, this guide ahead gives you a brief overview of the practice of budgeting – the basic what, why and how of it. Later, if interested, you can dig deeper.
What Is Budgeting And Why Are People So Keen On It?
Simply put, budgeting is the effective management of your financial resources. It roughly translates to using your money optimally, such that you derive the most from it. The significance of household budgeting can be summed up into three essential points:
- To make your monthly expenses comfortably.
- To keep yourself out of excessive debt.
- To have a pool of savings for the future or in case of contingencies.
- To avoid any superfluous expenditure.
How To Go About Budgeting
The first thing that you need to instil in your mind is that budgeting is an inexact science. It has brought about results, but these results are inconsistent and dependent largely on behavioural traits, needs and tastes, initial endowment and several other variables.
In a nutshell, you must understand that budgeting is a different experience for everyone. As a result, you must make a conscious effort to not compare budgets or budgeting habits with others.
That being said, the whole process has a few foundational steps which need to be executed with due diligence to create an effective budget:
1. Setting Goals
The first step of the process is the most crucial one because it sets the tone for the planning and allocation you’re going to do ahead.
This task involves setting financial goals of any kind you’d like to meet in a particular time frame. They can range from as simple as not going overboard with the christmas expenses to repaying a heavy loan with interest in monthly instalments.
Knowing what you want is essential in making the right decisions for the future. Your future goals dictate your spending today.
For instance, if you have kids, then you’d probably like to start saving for their college fund, and a chunk of your savings would end up there. But if you’re a little young and just started out, chances are you’d like to invest in some property, perhaps a house or a vehicle.
All in all, listing exact targets is the primary step and involves a lot of thinking about the future.
2. Taking Stock
The next step is taking stock of your resources and where you end up utilising them. Create two separate sheets, one listing all income sources and the other specifying the different heads under expenditure.
For the income sheet, bear in mind that you’ll have to make the necessary adjustments for social security payments; medical, life, and, if applicable, other insurances as well as income and other applicable taxes.
The expenditure sheet should begin with the necessary subhead of utilities and repayments. Utilities include all the recurring payments, be it rent, water, electricity or the internet. These are payments that cannot be compromised.
Repayments include any monthly loan instalments which are to be made. After necessities and priority payments have been listed, write down all other expenditures.
3. Making Adjustments
After you have specified the cash-flow sources and drainage, go ahead and calculate your savings. There can be three scenarios:
You Have Considerable Savings
This means that either you can ease down with your budget and spend a little more, or better yet, mobilise the money by investing it into a profitable scheme with a sizable return. The stock market has a variety of options concerning the latter.
Your investment plan would also depend on your needs. If you’re looking for a fixed monthly cash-flow, you can opt for fixed return schemes.
Less risk-averse individuals can go for a higher rate of return in the form of stock market mutual funds and other investment options.
You End Up With A Meagre Positive Balance
You’re living paycheque to paycheque and are barely making ends meet. While you are afloat in the present tense, you are compromising the future by not saving enough. It is likely that in times of exigencies, you’ll be running tooth and nail for funds.
You Have A Negative Balance
A negative balance is a red flag. You need to sit and introspect where you’re going wrong. There can be ways to rectify this issue.
First, take a look at the income sheet, and see whether you’re being paid at par with others in the same position. If not, you can try asking your superiors for a raise. On the other hand, glance at your expenditure sheet and look for unusually high payments.
Even necessities need to be thoroughly inspected since you might be paying very high rent, or your preferences for that premium brand of cookies might be causing your wallet to bleed.
Strategise And Stick To It
After the assessment has been made and loopholes identified, it is time to think of a budget strategy that aligns with all your goals. You can choose from a host of tried and tested formulae like the 80/20 rule or the 50/20/30 rule or tailor a plan of your own.
Now that the plan to stay on top of your monthly household expenditures is in motion, make efforts to stick to it. You might feel suffocated in the initial period, and relapses are common. But remember to keep in mind the big picture – the goals you have set for yourself.