If we define Financial Budgeting in layman terms, it can safely be called Expense management. It creates a sense of discipline and helps one in organizing his/her financial responsibilities. The first step that you take towards creating your budget plan would require you to create two bank accounts:
- Expenditure Account
- Investment Account
One of the above accounts can act as the saving bank account itself. Limit all your expenses within the expenditure account while the entire sum in your investment account should be dedicated solely for investment purpose. Moving further, create a monthly sheet with the above accounts and make a note of each expense or investment (under the concerned category), which is getting deducted. Ex: June sheet would contain 2 columns – Expense and Investment. Everything in June would be entered in this sheet only. After a few months, you would know exactly how much one would need to have in each account. Rest of the money should be transferred to the investment account and used appropriately. Expenses are of various types. One can categorize expenses as Household and Utilities, Transportation, Communication, Entertainment, Miscellaneous. Expenses can also be categorized as Fixed and Variable.
Is it Exciting?
Michael Phelps did not become a swimming champion the moment he dived into the pool. It took him a lot of time and practice. In the similar way, you need to first start off before thinking or even considering it to be a frustrating and not a very exciting job. Once you delve into budgeting, you will get clarity of your finances. By doing it regularly, you will be constructing a personal financial diary which will help you manage your financial life smoothly. Once you begin this, you will adapt to it over time. Take it on a quarterly basis. Make sure you don’t miss out even a single month in the quarter.
Half of the job is done the day you start preparing your budget. To complete it, you need a review on a regular basis. Review is just a check if your expectations match the reality. If you had done the 2nd step right, you are already doing a review every month. This will tell you the areas of improvement. Next you have to pay some heed to the areas which need improvement. Ex: You might have paid for an internet package with 3 months validity. You might not take this into account, but you would have to renew it again after 3 months. Hence, it is advisable to prepare monthly sheets for the next 6 months, so that expenses such as these can be noted down in advance in the concerned sheet. This will also inform you of the legroom for any discretionary spending. Also, one needs to remember that a budget cannot replace a financial planner by any means. It can only give you a sense of your finances. A financial planner can help you not just prepare and review the budget, but also link this to the overall financial plan in order to fulfil your goals.
The entire planet has gone digital. There are a lot of online tools available free of charge in the online market. These help you track your income and expenses in a simple manner. All you need to do is to enter the details required by the tool. To make your life easier, it also gives you the analysis using charts. This will be useful especially for people who rely on online data since they do not like to store data physically.
It’s important to prioritize your spending, understand the difference between necessity and luxury. There are some expenses which you cannot avoid. You need to look into the other category, those which you can avoid. You need to set a limit for yourself each month with respect to such spending and make sure you stick to it. Every time you get a bonus/hike, you might want to just jump on to spend this on a costly gadget or an expensive LED TV. Curb that instinct, stick to the older spending pattern and put the extra bucks into the investment account. Little things can be done to boost your savings. Pack your lunch box, cut down on weekend parties, buy things in bulk, and limit the number of movies to be watched every month.
This would only be the starting point in your financial journey. Once you get this right, you need to plan ahead about insurance, investments, retirement, etc. In case you do not have sufficient time and knowledge to do it yourself, you can seek help of a professional such as a Certified Financial Planner (CFP). InvestmentYogi offers comprehensive financial services through Certified Financial Planners (CFP’s).
Involving your Family
Family is a team and team work always yields better results, isn’t it always better to be We than Me? It’s pretty important to get the entire family involved in the process of budgeting. Discuss all the financial transactions with the family and take important decisions after consulting them. You can make a common family budget. Make the sheet available for everyone and ask them to note the relevant expenses. This will also inform them that you are serious about this and your discipline will also get injected in them. This could well bring a transformation in the spending pattern of the family and boost the savings in the long term.