Nancy and Mridula are good friends. They have similar incomes and lifestyles. But Nancy is barely able to make ends meet, while Mridula saves 20% of her income.
What does Mridula have that Nancy doesn’t? A budget.
For Nancy, a budget is something that the government announces in March every year. For Mridula, a budget is a way to plan her monthly income, expenses, and savings.
We present a simple three-step process to get you started on your budget: Analyse > Allocate > Track.
To make a budget you must first know how much you are earning and where you are spending the money.
- Divide your budget into three parts: Income, Expenses, and Savings.
- Income: List out your sources of income and net income in hand (after all deductions)
- Expenses: Track your expenses for at least two to three months across categories like:
Food & Groceries
Fashion and Clothes
- Savings: The balance after all your expenses is your savings or investible surplus. If you already have investments include that in the savings column
Now that you know where you are spending your money, it’s time to optimize your expenses without compromising your lifestyle.
- Financial Goals: Define your goals, and work backwards from there. For example, let’s say you want to save Rs 20 lakh for your child’s education ten years from now.
- Use online calculators to get an idea of how much you need to save every month to achieve that number.
- Now look at your savings column. If it’s not adding up, then you need to cut back on your expenses.
- Obviously, you can’t cut back on some costs like food and groceries or debt repayment or medical or education. But do you really need that expensive data plan? Can you eat out six times a month instead of eight? With some planning, you can significantly reduce your entertainment, utilities, communication and transport costs.
You have put down a budget plan, and allocated funds to the different categories. You must now track and review your expenses every month.
- Has your allocation been practical?
- Are you able to stick to the budget without major lifestyle compromises?
- Are you cutting back on important things in life, and spending more on luxuries?
- Are there costs that you had not accounted for?
A budget is not a sacrosanct document. You need to keep reviewing and changing it according to your evolving needs.
Staying on course
- It’s not easy to stay on a budget. But with each month try to get as close to your savings target as possible. Any saving is better than no saving
- Don’t have unrealistic expectations of yourself or your budget. Start with moderate goals. And as you achieve them increase your expectation.
- Keep funds for emergencies.
- Consider any annual or quarterly payments that you may have to make. For example, insurance premiums or car servicing.
- Look for opportunities to save – buying saver packs, booking tickets in advance, using car pools, reducing phone data usage, etc
A good budget is like a good diet. Don’t starve. Don’t overeat. Find the sweet spot.