Regardless of economic standing or age, everyone can benefit from creating and managing a budget. It gives you a sense of control over your money. Think of a budget as a financial foundation. However, each person’s foundation is going to be different since each financial situation is different.
Why you should budget your money
1. It builds discipline
Having a budget helps you stay disciplined to organise your finances, which is the first step in knowing your overall financial health
. A budget compels you to map out your long-term and short-term goals, save your money and keep track of your progress to make your dreams a reality.
2. It helps you save
The more time you spend thinking about your money, the more focused you are on building your wealth. Once you start thinking about money in a structured way, you will be able to find more ways to save and more ways to generate income.
3. It leads to a happier retirement
Let's say you spend your money responsibly, follow your budget, never carry credit card debt and set aside a portion of your earnings each month to contribute to your retirement funds. You'll eventually build a nice corpus for your retirement. After all, wouldn’t you prefer to spend your retirement golfing and travelling rather than struggling to make ends meet?
4. It helps avert crises
Life is filled with unexpected developments and crises. Losing a job or dealing with an illness or hospitalisation, are all within the realms of possibility, and can lead to serious financial turmoil. This is exactly why everyone needs an emergency fund. Your budget must include an emergency fund that consists of at least 6-12 months’ worth of living expenses. This extra money will ensure that your life isn’t derailed by a crisis. Build an emergency fund into your budget, set realistic goals and start small.
5 essential budgeting rules
1. Set goals
Identify important goals you want to achieve that will require money. Set 3-5 financial goals and priorities. For instance, having a corpus of a certain amount to provide monthly returns for living expenses could be one such goal.
2. Create categories
Consider dividing your money into categories based on how it is spent. Typically, you will mark each entry as being an income or an expense, to make tracking easier.
3. Record expenses
Estimate your spending for the coming month, including fixed and variable expenses.
4. Record earnings
Estimate your net income for the month – list each expected source of money you may receive.
5. Make a calculation
Subtract your projected expenses from your estimated net income – income minus expenses helps you calculate your budget.
Budgeting pitfalls to avoid
1. Not having a budget plan
The greatest financial misstep you can make is to spend without a budget. If you don’t establish a plan for how to spend your money every month, you are likely to end up in financial crises, or at the very least, overspend in a way that could eventually lead to being in debt.
2. Guessing at monthly costs
Instead of playing the guessing game, track all of your spending in various categories for a month and use the totals as a baseline when you set up your budget.
3. Living pay cheque to pay cheque
Many people live a pay cheque to pay cheque lifestyle, but you must realise that unexpected developments may occur in life. If you are not ready for these unforeseen times, you will feel overwhelmed when they come. To avoid this, experts advise that you set aside at least 6 months’ worth of expenditure in a savings account or a liquid fund that can be easily accessed in times of uncertainty.
4. Neglecting retirement savings
Controlling your monthly expenses and paying off debts is good, but while doing all of that, remember that you will retire soon. A good way to provide for that is by participating in employer-sponsored retirement plans
and other retirement funds.
5. Not tracking your spending
If you do not monitor your expenses, then even small expenses can balloon and jeopardize your budget. An effective way to avert this is to find an expense-tracking method that works for you, be it a spreadsheet, software, online app or the old-fashioned pen and paper.
6. Not working as a team
As long as you live in a house with your partner, you both share a financial life together. The stresses of everyday life can be so overwhelming that you sometimes forget to discuss a budget with your partner. If you do not make time to regularly discuss how to accomplish your goals and budgets, it might affect your financial life.
7. Not budgeting for fun and leisure
Don’t forget to live a little. It’s good to pay off your debts, loans and credit cards fast, but you also deserve to have fun and enjoy the world out of your budget. Don’t just save all your money and deprive yourself of joys in the present.
Constantly monitor, adjust and maintain your budget so that you can enjoy a healthier financial life. Cultivate the habit of saving part of your monthly income and take time out to regularly improve your financial plan. This will help you manage everyday expenses and still set you up for a prosperous future.
It's never too late to take control of your personal finances. By following these steps and taking help from professional advisors, you can always get your finances on the right track.