It’s the same story every month right? You thought your spending was mostly under control this month, and you felt you were finally on the way to figuring out budgeting and saving. However, when the credit card bill finally knocked on your door, you got that same jolt of shock. You scanned the items and realized that there might have been a few things you could have done without. So, you promised yourself that you’d be more careful from next month. After paying off the bill, you promptly forgot about it till the same thing happened the month after.
Having suffered the same cycle myself for many months, I finally decided to take a calculated approach to my expenses. Following is a method I’ve been following to manage my expenses better.
Step 1: Figure out what you’re spending on
Realization is key. I know it’s scary to face what you’re spending on and how much, but there really is no way out. First step is to figure out where your money is going each month. There are a few simple ways to do this.
1.) Download a money tracker app and input your expenses each month – might make sense to do this for a few months to get an idea of your key expenses. I use the Spending Tracker app. I know this is a little old-fashioned but I like this method the most. I personally key in my expenses as I spend and that helps me track better and get an idea of my habits.
2.) Go through your credit card bills and figure out the major expenses. For items which you don’t use your credit card for, you might need to check bills, receipts etc.
3.) Use the money-tracker apps which read your messages and figure out your credit card deductions and balances. I personally hate these as they tend to double-count but up to if you want to use these.
Step 2: Categorize your total spend into spend buckets
Once you’re done with the first step, which is the “tracking and recording” part of it, you’ll get an idea of the major spend buckets. This could be groceries, eating out, air-tickets, cosmetics etc. Make a list of all your spend buckets, however small they may be. Basically everything you spend on should be categorized into one bucket or another.
Step 3: Distinguish between critical and non-critical spend buckets
Once you have all your spend categories, you’ll see that some of these are necessary spend categories. These include rent, electricity expense, internet expense, transport expense etc. There will also be some non-critical expenses. These will be eating out, traveling, spending on hobbies etc. This step is all about categorizing your expenses into critical and non-critical items.
Step 4: Figure out where you’re spending too much
Now it becomes much easier to figure out where you’re spending the most. Zero in on your non-critical spend buckets, and figure out where you’re going overboard. Now, I would obviously not think of eliminating any bucket completely. It’s important to be happy and not miserly. It’s absolutely alright to spend on your hobbies, clothing, make-up etc. The important point to note here is how much?You’ll see that there will be scope to reduce your spending on many of these non-critical categories. For example, I figured out I’m spending too much on eating out. But, I felt that the amount I spend on books is completely fine, as it makes me happy. But, eating out doesn’t appeal to me that much. Hence, there’s scope for reduction here.
Similarly, you need to go through your non-critical categories, and see where you can cut down without it significantly affecting the quality of your lifestyle and your happiness levels.
Step 5: Creating a budget
Now, this is my favorite part. Armed with the knowledge of all your spending habits and expenses, now you are well-equipped to create a budget. This is supposed to be a representative budget for one month. Make a note of all your critical expenses – likely there will be no major reduction here (though there may be if you’re not using optimum phone and internet plans for your home). Then, make a note of all your non-critical expenses. For each major spend bucket, note down how much you would like to spend on each of these categories.
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Step 6: Modify your budget to save the amount you want to
Just creating a budget isn’t going to help, if you are still spending as much as before. Obviously, the reason you decided to make a budget was because you wanted to save more. So, decide on the percentage you want to save (can be 50-60% of your income). And allocate the rest to your expenses. Now, if your budgeted expenses are exceeding the allocation already, then you need to further zero in on categories, and see if some of them can be spread over a few months. This is an iterative process, and you might need to go over your budget a few times till you’re happy with it.
Step 7: Following your budget!
Now that you’ve done all the hard work, we actually come to the hardest bit – implementing your budget in your life. To help you do so, you’ll need to track your expenses diligently for the first few months till the habits set in. I would suggest using a Spending Tracker to input your expenses as this will keep you in touch with what you’re actually spending. Also, think of the long-term impact to help motivate yourself. Saving just INR 10,000 in a month equates to more than a lac of savings in a year. So, is that worth the extra meal outside? You decide!
It’s up to you how you want to prioritize and save. I believe in spending on the things which really matter to you and make you happy (along with the necessary items of course). So, don’t be drastic, just be a little mindful of your expenses. That should go a long way in inculcating better spending habits.
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