Understanding the Art of Budgeting

 How come I lost track of my spending? Why do I fall short on my saving goals? Why do I end up in debt frequently? A lot of people have lost their sleep over figuring out the answers to these questions.

When you think about the ways you might want to spend an evening, you might imagine yourself curled up with a book, watching your favourite TV show or at a restaurant having dinner with friends. The thing is, a few hours of quality time with a spreadsheet and calculator isn’t going to kill the fun. But if you don't make a little time to create a budget, and then promise to stick to it afterwards, your financial goals are likely to go for a toss.

As the renowned American personal finance personality David Ramsey has stated ‘A budget is telling your money where to go instead of wondering where it went’. Therefore, we got to keep a track of our income and expenses in order to achieve our financial goals.  

Steps to Make a Budget

So if you have decided that you’re going to follow a budget. The next question that might pop into your head is, “How do I do this?”

Mastering the art of budget isn’t rocket science. Follow these simple steps and you are sorted.

Step 1: Identify your goals

Write down your personal and financial goals. If you are student you might want a bicycle/scooter, pay your tuition fee ,etc. If you a are married person you might need to plan for your kids’ education , marriage, etc. Carefully make a list of goals that you want to achieve in the coming years.

Step 2: Record your income

Take a look at your pay slip and make a note of your monthly income. If you are a stock trader or a freelancer meaning you have a variable income, go over your bank statement for the last few months and calculate the average amount you earn each month.

Step 3: Record your expenses

We have to understand our spending pattern instead of just putting down random figures against various categories of expenses. For next 7 days, record your expenses in any expense tracking app, an excel sheet or a notebook. Put the expenses under specific categories like mentioned below:

1. Rent and Utilities

2. Food and Ration

3. Transport

4. Shopping and Entertainment

5. Vacations 

6. Repairs and Maintenance

7. Education

8. Miscellaneous

Once you’ve tracked your expenses over a week, you can now extrapolate how much you’d normally spend in a month. Sit with a calculator and write these monthly figures down on a sheet of paper. Set the maximum amount you would spend under each category.

Aim to reduce your expenditure on discretionary items and invest the savings in bank account or stock markets as per your financial literacy. Investing in Mutual funds through Systematic Investment Plan (SIP) is an effective and simple way to enter into stock markets for people who lack the technical know-how of financial markets.

Step 4: Tracking progress

Once a week, set aside few minutes to collate your weekly spending in your budget sheet. Compare the actual numbers with your targets. Don’t be hard on yourself, especially in the first couple of months. Consistency is the key to following a budget.

A decision to start budgeting is great. But a decision that doesn’t translate into action is nothing but a wish. Most of us just have a rough mental outline of how much we spend and on what. But implementing these steps, week after week over just a few months would form the backbone of your financial life.

Following a budget will enable you to have a balanced life. It will steer you towards being debt-free and will ensure that your focus from the ultimate goal of financial independence is never lost. Not everyone practices good money management habits but the people who do, are financially independent and stress-free. You can find the best company by using Ticker and can even use the Stock Screener.

Budgeting during Covid 19

Only those people who regularly saved can really know the relief savings provide during uncertain times like Covid 19. Besides savings this uncertain time calls for some changes in the spending habits too. Many people are finding it difficult to balance the fixed monthly expenses with their variable income. If fixed monthly payments are becoming a headache, you can try these strategies:

1. See if your municipality offers payment deferral on property taxes. A few months deferral could give you the time you need to get back on your regular stream of income.

2. If it becomes challenging to make your monthly payments like your credit card, contact your service providers to make necessary payment arrangements.

3. RBI has asked banks to allow a second moratorium. Eligible borrowers, who didn’t use the first loan moratorium offered last year, can use the second one and those who did use the first one can get the moratorium period extended.

Review your priorities instead of tightening your belt too much. That could mean putting certain goals or projects on hold, like renovations, new mobile phone, pool, car, appliances or electronics.

The fall in expenditure due to no/minimal spending on travel, dining out, shopping, etc must be saved and accumulated to form an emergency fund.