How to budget your expenses efficiently

Financial security is an important goal and setting a budget and adhering to it can only help to attain this goal. Making a budget to maximise savings and optimising investment planning while managing your expenses and finances can be difficult but, it is the first step in accomplishing your short-term and long-term financial goals. The more efficiently you budget your expenses, the better your financial planning, and the closer you are to achieving your financial goals.
Sep 2022
5 mins read
Identifying Income and Expenses
Starting with your income, make a note of all streams of revenue including salary, rent, interest payments, etc., and your monthly expenses on essentials like groceries, rent, EMI payments, utilities, etc and non-essentials like subscriptions, dining out, shopping, etc.

Setting Financial Goals
The most challenging part of making a budget is determining your long-term and short-term financial goals. Without this, you will end up overspending and become vulnerable to unexpected expenses.

Align your personal goals with your financial goals and assign a time frame to each. These goals should cover all aspects of your life, including higher education, annual holidays, marriage, and children, to buying a house, car, and retirement plans. Categorise them as short-term, mid-term, or long-term goals to create a roadmap for financial goal planning. It tells you how much, where, and when to invest to earn enough returns to meet the set goal.

The 50-30-20 Budget Rule
The 50-30-20 framework1 is a balanced and simple framework to adhere to and it inculcates the much-needed discipline you need to attain financial security. The rules are:

  • 50% of your after-tax income should be used to pay for essential expenses
  • 30% of your income for important (but not absolutely necessary) expenses, and
  • 20% of your income to save and invest towards your goals.
Budgeting for Emergencies
It is essential to budget for emergencies or unexpected expenses. Although it is impossible to be prepared for every situation, you must create an emergency fund which ideally should be worth at least six months of living expenses; but if you can save up to twelve months’ worth of living expenses, it’s even better. And to make this happen, every month set aside a small portion of your income towards the corpus.

Budgeting for Retirement
Retirement should be factored into your savings plan right from the time you receive your first salary. No formula will tell you how to plan personal finances or how much money you will need when you retire. The general rule of thumb in financial planning is to have a multiple of your income set aside at different ages2. At age 35, you should have twice your annual salary saved up. At 50, you should have five times and by the time you are 60, you should have seven times.

Every month, a part of your income should be budgeted to invest in your retirement plan. This goal can be achieved with good budgeting practices, sound personal finance knowledge and management, and the power of compounding.

Good Habits that Are Essential to Adhering to a Budget
It is important to discipline yourself to follow the budget plan you have made and track your progress to ensure that you are on course. If you do take a loan, be smart about how you borrow the money, determine a borrowing budget that will allow you to meet your financial goals as you pay your loan off.

Be mindful of credit card debt as the interest can jeopardise your budget. If you follow your budget plan, the entire amount due can be paid off at the end of your bill cycle, saving you from massive debt. Regularly review your financial goals and financial planning needs, your budget plan and investments will need modification if there are any changes.

When you are committed to your budget, you will be able to control your personal expenses and make smarter investment decisions. Your budget will help you modify your investments, manage your expenses, and meet the desired savings, investment and lifestyle goals. A budget makes it easier to start and maintain SIPs (Systematic Investment Plan) in a mutual fund scheme depending on your financial goals, time horizon and risk appetite.

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