As adults, we are expected to manage our money responsibly, but seldom taught how to do it. We should somehow be able to meet our expenses and save for our desired goals without borrowing more than we can comfortably repay. The foundation to wise money management is the “Budget”. A budget is a plan for your money, which is based on your choices and priorities.
Follow these easy steps to build a budget that works for you:
Step 1: Create SMART financial goals -
When it comes to budgeting, what works for your friend may not be ideal for you. Therefore, before you set a budget, it’s important for you to identify what is important for you and then create the financial goals you want to achieve. Those who set specific goals are 1.2 to 1.4 more likely to accomplish them. When setting goals, make sure they are S.M.A.R.T:
Specific: Have a clear goal you’re working towards, whether it’s buying a new cell phone, saving for a down payment for your home, saving for emergencies or for a comfortable retirement.
Measurable: Once you identify your goals, calculate how much money you need to achieve each of them.
Achievable: Don't make unrealistic goals because you can get demotivated if you don't achieve them. For example, if you to buy an iPhone in three months and need a down payment of Rs. 20,000 when you barely save Rs. 2000 per month, it will not be achievable in the given time frame.
Realistic: Always have a buffer for unexpected expenses- whether it’s a health emergency or a repair for your car. Keep in mind that life can throw surprises at you. Being unprepared at such a time can derail your future plans.
Timely: Set a time limit to achieve your goal- say, building your retirement corpus by the time you are 50 or building an emergency fund to cover 6 months of your expenses, over the next 2 years. This will help you understand how much you will need to start saving right now, on a monthly and even weekly basis.
To know more about goal setting, read our article on how to set goals for effective budgeting.
Step 2: Identify your income
Consider how much you earn and where your income stands as of now. Consider all sources of income besides your monthly salary including spousal income, tax refunds, incentives, and rental income.
Pro tip: In case you have an irregular income, use the amount that you earn in your lowest-earning month as the base for your budget to ensure that you’re not overestimating your income.
Read our article “Are you overestimating your income?” to understand what income should be added to your monthly budget preparation and how to budget in the months you earn extra income.
Step 3: Track and Record all expenses
Tracking your expenses is an effective way to understand where your money is going. If you feel overwhelmed writing down expenses at the end of every week, make a note of it as you spend money. Whether you prefer the pen-and-paper approach, use an excel spreadsheet, or rely on a mobile app to help track your expenses, make sure you list all your spends- whether they’re made by cash, card, or online. Tracking expenses for a minimum of 2-3 months can give you an idea of how much money you are spending, and where.
Pro tip: Record everything, from your major expenses such as rent and car instalments down to your smallest expenses- even the 10 rupees you spend on your tea every day.
Refer to our comic strip “Are you counting even the smallest expenses” for more tips on how to track expenses.
Step 4: Categorise expenses based on needs and wants:
Almost everything you buy involves a want vs. need determination. Ultimately, how you make these choices will decide if you reach your goals or not.
Once you start recording your expenses, divide them into essential (needs) and non-essential (wants) expenses.
Essential expenses can be both fixed and variable:
- Fixed essential expenses such as rent, loan instalment, school fees, domestic help and monthly insurance premium are usually the same every month.
- Variable essential expenses include spends on groceries, Prepaid mobile and WIFI bills, electricity bills or fuel expenses that might vary month on month depending on how much you consume.
Next are non-essential expenses or ‘wants’. These include buying a new phone, going to the movies, buying a new dress, planning a weekend trip, or dinner and drinks with friends. Some of these expenses are to improve your lifestyle or to have fun and can either be planned or on an impulse. This could also include any costs that exceed your normal budget like buying additional grocery items you don’t really need but was on an offer or using too much internet on mobile data, when you have WIFI both at the office and home.
Pro tip: If you are an impulsive buyer, try this- when you see something you want to buy, hold off on purchasing it for a week. If you still feel the need to purchase it after that period, go ahead and buy it, because it’s obviously important to you. Doing this not only cuts down on impulsive spending but also helps to plan ahead for what you really want to buy
Quick and easy budgeting format
If you’re just starting your budgeting journey, here’s a simple template you can use. For a detailed version of the same, click here.