With the Union Budget around the corner, the country is hoping to see some clean-up of its finance: outdated ideas must make way for fresh thoughts in order for progress to happen. And just as we look forward to having a Union Budget that’s well received in all circles, we are also reminded of the importance of having a budget in place in every household for the better management of its finances.
A budget drives you to understand your income in an analytical manner. It helps you mend your spending and saving habits in order to improve your financial health. It is, after all, the easiest tool to manage money.
If you haven’t set a personal budget yet, here are five reasons why you should do so right away:
1) It keeps spending under control: Only when you make a budget you realise how things add up. Small expenses which go unnoticed can lead to overspending. A budget helps you to avoid spending beyond your means and getting stuck in debt. You mend your spending habits and refrain from wasting away your hard-earned money.
2) It helps in setting financial goals: People are often occupied with their everyday expenditure, failing to plan their children’s higher education and marriage, or life after retirement, effectively. A budget helps you map your short-term, medium-term and long-term goals and save up accordingly to meet those goals. It gives you a fair idea about your existing financial condition, regular expenses and the savings required. Once you know your priorities right, you know which instruments to invest in to meet your goals on time. Cost of your children’s education, marriage and even regular expenses are only going to go up with time, thanks to inflation, and you have to pick suitable investment instruments for it at the right time to be able to secure your future. And drifting aimlessly and indulging in impulsive shopping can be avoided only when you have set priorities.
3) It helps you build wealth: You know what they say, it’s not the amount of money you earn that makes you rich. It’s the amount you save. Budgeting helps you allocate resources in the right places. It helps you assess what you have and how much risk you can take in order to be able to decide on the investment instruments. The right investment instruments can generate a passive income for you through interests and capital gains which can be an addition to your active income. The things that you aspire to own, say a luxury car or a house, which are a challenge for you to purchase at the moment with your current income, can be affordable with this additional income.
4) It prepares you for emergencies: No one wants to think that anything bad could happen to them, but a job loss or health emergency comes without a heads-up sometimes and you need to be prepared for it. Your budget has to have a separate contingency fund to ensure that your regular expenses are taken care of even in worst of times. An ideal contingency fund should be worth six to eight months of your expenditure. A certain amount of discipline is required to create this fund and budgeting is an easy way.
5) It keeps you more focused on your career: Budgeting helps you understand what you want and what you’ve got better. Once your goals are in place, you work towards achieving them and this helps you focus on your career better. Also, if your finances are sorted out, your mind is peaceful to take the right decisions without being unduly stressed out.
(The writer is CEO, BankBazaar.com)