Probably, the only thing that can compete most with music in evoking different emotions in different human beings upon hearing it is – the word Budget!
The lazy dread it, the broke fear it, the snob looks down upon it, the ignorant avoids it, the accountant grapples with it yet everyone needs it!
Okay, so let me begin by making you feel good about it (so that you read further ;)).
Always wanted to be the CEO of a company?
Imagine being that CEO who manages his own cash flows!
Imagine always having enough money to buy the things you need!
Imagine being able to readily answer the persistent question of “Where does my money go?”
Excited already? Well, wait till you read the next line.
Imagine paying off all your debts while enjoying your life and still saving money!
A little time spent in making a good budget plan and budgeting your expenses can go in long way in helping you achieve your financial goals and promoting your overall well-being.
There are two types of budgets – long-term and short-term. Long term will take into account your long-term assets like car, house, jewellery and investments. Since we are talking about your expenses here, let us focus mainly on your short-term budget.
How to begin?
Firstly, you will have to do some research and be prepared for some shocks. Start by tracking your expenses by reviewing your credit card bills and bank statements for the past 12 months.
This is the most important step in creating your financial awareness and in helping you make a well planned budget. Trust me, when I first made my budget, there were some shocking revelations! I didn’t even know that I was spending 20% of my salary on Ola and Uber (I started taking the metro since then ;)). Or that my expenditure on my wardrobe every month was enough to get me a return ticket to Bangkok. This step will give you a fair idea to the question of ‘where my money goes?’ and help you in knowing ‘where your money should go?’.
Divide these expenses into fixed and variable and analyze them.
Fixed expenses include rent, conveyance, food, mortgage payments, utility bills like electric, gas, water, and telephone bills. This will help you know if there any bills or subscriptions you could reduce or cancel entirely. Variable expenses include your Friday spending, your wardrobe, entertainment, vacation and other expenses. You might find out that you are spending way too much on eating out.
These can be further classified into needs and wants. Food, electricity, gas are needs while clubbing and vacations are wants.
Note down your income from all your sources for the past 12 months. Don’t count windfalls here (although I do consider my Rakhi and Bhai dooj earnings here :D). If you have a fixed salary or earn a fixed amount of money every month, well what could be easier?
The final step where we go into the future from the historical – preparing a budget with the above data!
The 50/20/30 rule of Budgeting says that you should spend 50% on your needs, 30% on your wants and keep 20% for your savings.
How to make a budget?
- Create a primary budget– To calculate fixed expenses, take an average for each month over the past year, then add about 5%. For example, if your electricity bill varies seasonally but averages to Rs. 2000/- per month, you should estimate the bill at Rs. 2100/- per month. If you plan to buy a car anytime soon, make sure to account for its installment.
- Set short-term goals with the leftover money– The goal may be paying off all your credit card dues or saving Rs. 50,000/- for that Bali vacation. Make clear and explicit goals.
- Budget the rest of your spending– This will include focusing on your ‘wants’ and your variable expenses. Budget how much you will spend on your wardrobe and in your weekends. Also, keep a miscellaneous category for sudden expenses like medical emergency that might prop up.
Most importantly, Stick to your budget!
The best part is that if you stick to your budget, you can treat yourself occasionally without any guilt!
So go ahead and start budgeting!