For any individual or a family, budgeting is the base for financial planning and is very crucial for financial strength. Most of us hesitate to make a budget as we think it is about cutting out all the fun in life.
For any individual or a family, budgeting is the base for financial planning and is very crucial for financial strength. Most of us hesitate to make a budget as we think it is about cutting out all the fun in life. However, budgeting is about conscious allocation of funds. A business will become weak if its income and expenses are not under control. Similarly, a family will not be financially strong if its income and expenses are not under control. Budgeting is not a complicated and tedious job and the trick is to break the whole process into a few small steps.
First, one should note income from various sources. Then track one’s expenses. After that, deduct the total expenses from the total income. If the result is a positive number, then one is spending less than what one is earning. If the result is a negative number, don’t worry. The idea of budgeting is to identify the loopholes in our income and expense pattern. Just a few small adjustments to your spending habits could help you improve your financial situation.
Income and expenses
It is easy to list the income from employment or self-employment. However, we tend to lose track of income from investments, rental income and other miscellaneous income. Also check if there is any other annual income. Don’t forget to record the incomes received by way of cash equivalents like meal voucher and credit card reward points. We can easily list all the major expenses. But listing the miscellaneous and petty expenses would be difficult. This is where the collected financial statements like utility bills, bank account statement, etc., would help. Don’t forget annual expenses such as life, health and vehicle insurance and property tax. Once you have recorded all the expenses, then split them into fixed expenses and variable expenses. This classification will provide much more clarity.
Savings or overspending
Now you have your total income as well as total expenses. Deduct the total expenses from the total income. You will know whether you are saving some money or overspending. If you are saving some money, channelise that money into priority areas such as clearing your outstanding loans, retirement savings or investing for children’s future. If you are overspending, then you need to make some adjustments to your expenses. On your expenses list, pay close attention to the variable expenses. This is where you can cut a few expenses. Each and every month we need to keep aside appropriate amount for proportionate annual expenses. You can find out the reasons for overspending. Mostly, it would be emotional buying or unplanned shopping. Once you have identified the reasons for overspending, then find out the steps or precautions to be taken to rectify the same. Every month set aside an hour to compare the actual expenses with the budget expenses. If there is a negative deviation, find out the measures to control them.
Behavioural aspects of budgeting
Budgeting is not a one-time activity. It is a continuous process. Normally, we start budgeting with a genuine motive. But after a few months you may get sidetracked and it may lose focus. Therefore, one needs to understand the behavioural aspects of budget. Never focus on the negative aspects. Focus on the benefits of successful budgeting. What will you accomplish by creating a budget? It could be becoming debt free, saving some money for a vacation, planning for retirement, buying a home or funding children’s future plan. Over a period of time, budgeting may become routine and hence boring. Set a few short-term goals like trying to repay the personal loan in 18 months instead of 36 months. If you achieve it, reward yourself. Recognition could be a good motivating factor. Inform all your family members, friends, colleagues and well-wishers about your progress on budget. One needs to keep realistic expectation on the outcome of the budget. Over expectations may demotivate you. Budgeting is not a magic but an art. You will be able to progress only over a period of time with constant practice. So go ahead and create one for you and your family.
The writer is director of Holistic Investment Planners