Budgeting is an important skill today. Especially with inflation.
Even high salaried professionals end up leaking a substantial amount of their total earnings on things they don’t need. It’s hard and even impossible sometimes to determine this leakage unless you carefully audit your expenses every once in a while.
When things get financially tough, or if they end up in credit card debt, a personal loan will help.
And the budget is the most important tool in determining it. This budgeting guide will be able to lend you a hand.
Differentiating between wants and needs
The first step to good budgeting is to differentiate between wants and needs.
- Needs are basic utilities that you cannot live without. All your necessities and basic amenities come in the needs category, such as clothing, food, and shelter.
- Wants are things you desire or like to have, but can easily live without. Everything from a monthly data pack you don’t use to a Netflix / Disney Plus subscription can easily fall into wants.
It’s important to define your needs and wants. Put them in separate columns. See what you can live without.
The wants are mostly subscriptions and services. They can be magazines you rarely read or a subscription to a service you liked at one point in time.
Why is it the first step to differentiate wants and needs? Because everything else follows this. If you have a large number of wants that you deem as necessary as food, then know that good budgeting will never come out of such an arrangement and you will continue to depreciate your wealth and ultimately, future savings.
Be your own critic and figure out what classifies as a want. If it feels like it can probably be a want and not really a need, then it probably is a want.
Tracking where your money is going
Your money is spent on a daily basis. Nobody lives for free. Your rent, the internet connection, phone bill, electric bill, and other services are something you are spending money on every day without realizing it.
When you make a big purchase, for example, a new phone, this leaves a lasting memory print in your brain. “I made a big purchase just last month.” You remember this for a while.
For example, shortly after spending a fortune renovating your home, you might be extra wary of the next few expenses you make. This allows you to save considerably more than you would have otherwise while having pretty much the same lifestyle.
However, you don’t get this feeling on a continuous basis.
Things that you have subscribed to for a while now or things you purchase as a part of your daily habits don’t register as strongly. When combined, they can easily dwarf even some of the big expenses, but you don’t bat an eye for these.
That’s where the problem lies. Finding out these hidden small expenses that culminate into a large sum over the long run is precisely what you need to do to answer where is your money going.
Save on your spending, cut down when you can
Saving on your expenses is crucial to having a good budget in general. For example, we make use of good deals and opportunities as they present themselves. This applies to shopping online and utilizing any coupon codes.
Using discount codes for basic necessities such as groceries or repairing important electronics is great. However, there’s a way companies do their marketing that ends up costing you more than natural.
Let’s take a scenario.
An online food delivery app sends you a notification that you can get 20% off on select restaurants. If you do make an order for the sake of using the coupon, then that’s not really a type of saving. Discounts on essentials are good (such as in supermarkets that you frequent for your rations). Discounts that companies use to increase their sales end up costing you money that you wouldn’t have spent otherwise.
Be cautious in which offers you use. Only use coupons and discounts for stuff you need.
Preparing a budget: What you should know
A budget is a way to document your income and expenses.
Consequently, it allows you to determine your spending patterns and income channels. It also lends insight into the costs you can cut. However, note that you have to maintain a budget for at least a couple of months and add all transactions religiously, missing none, in elaborate categories for it to function well.
Half-baked budgets won’t take you anywhere.
Another important thing to discuss is that it might feel like a gigantic task to include all your transactions in your budget and you might soon give up on this habit. This is an inevitable part of starting a budget. Everyone starts a budget this way – being unable to stick to it for a number of reasons such as it becoming a heavy task, loss of interest, or forgetting a few transactions.
It takes a while to get yourself completely habituated to maintaining a detailed budget but don’t worry, you will get there. And the potential rewards are many once you get there.
Steps to preparing your budget
Finally, it’s time to work on your budget. The budget is a 5-step process.
1. Monthly earning and income channels
The first step is calculating your total earning. It includes all your income sources. It can be just your salary or a series of income sources if you are a businessperson. Other means of stable income apart from the salary (such as rental income, interest over investments, etc.) will also be added.
This gives you your monthly earning. You might have other capital as well such as stakes or conventional investments. Don’t include any source that’s not stable. Bonuses, incentives, commissions, and so on, therefore, don’t get added to your monthly earning.
2. Savings on a monthly basis
The next step is putting aside a part of your total monthly earnings as savings. You can save money in a bank savings account or alternative assets such as bullion or even cryptocurrencies.
Once this amount is deducted, it’s not a headache for your budget to track and follow the gains or losses associated with this sum. The budget assumes that you have done your due diligence before investing or saving so that the saved amount cannot be lost.
Even if your savings are obliterated completely due to some unforeseen reason – it doesn’t affect the rest of your budget.
Setting up the savings amount is, however, integral to budget planning.
10% of your income is the minimum you should put aside for savings. Note that the savings aren’t just for the future. Apart from cash for the future, you also need to take these into account:
- Emergency funds: You should put aside at least 3-6 times your monthly expenses as an emergency fund. This fund is only for emergencies such as unexpected medical costs.
- Life goals: Everyone has long-term goals in life. Maybe you would like to own a house in a different part of the country as a vacation retreat or maybe you want to buy a yacht once you retire, who knows. This will be factored into the budget after you have successfully saved up the emergency amount you set out to accumulate. Some of these are considered good debts.
3. Calculating your monthly expenses (needs plus wants)
Now it’s time to calculate how much you spend on a monthly basis. Taxes, debts, credit facilities, EMIs, transportation, shopping, rent, food, clothing, utilities, bills, and so on – you can have a varying number of expenses that are fixed to happen each month.
Insurance premiums, allowances, financial help to those dependent on you, etc. also go in here.
Do a simple calculation and subtract the monthly expense from the monthly earning (#3 subtracted from #1). Let’s assume you get an amount X after this calculation. Calculate the savings percentage (such as 10%) on X. Any money left should either go to increase the savings percentage (or any one of its components, namely future cash, emergency funds, or life goals) or you can simply keep it as surplus cash.
4. Budget discipline
Now, it’s time to tell yourself how much should you spend. Budget all your expenses. These can include expenses in the foreseeable future as well. It’s not important to spend the surplus at all. All of it can either go to savings or alternative assets. It can also stay as just that – surplus cash.
5. Budget monitoring, tracking, and optimization
The last and perhaps the most important step of the lot. It’s time to monitor your budget regularly. Budget adjustments are highly likely to happen once you follow your budget for a month or two. You will also need to make suitable changes based on pay increases, pay cuts, or additional expenses.
Remember to monitor and follow your budget
Following the budget system and monitoring it will allow you to derive timely insights from it. The insights will tell you where you can put more of your money and where you can cut expenses.
If you are planning to take on a loan to purchase a car, for a home renovation or to purchase a house, you can make use of a free loan calculator to plan your budget.