Budgeting is the initial step towards financial planning and securing your future. However, individuals fail to create a budget suitable for them. Even if they do, they fail to stay committed to it.
The problem is twofold. Let us decode the first part.
How to create a budget?
Track your income and expenses - Well, this is a no-brainer. Make a note of your income sources and find the monthly income from each. Your income source can be - salary income, pension, rent received, interest income, dividend income, etc. Next, list out all your expenses. Don’t leave out any expense, how much ever small it is. Also, do not leave out your leisure expenses/miscellaneous expenses. You can use an Excel sheet for this process.
Make note of unnecessary expenses - Once you list down all the expenses for a month, you will be able to identify the expenses you can avoid. Unnecessary expenses are those that are of no value to you and hence, can do away with them. Make no mistake, this is not an advice to reduce the fun element in life. You don’t have to sacrifice going to a movie once a month, taking a short trip for the weekend, occasional restaurant visits, etc.
Set life goals and allocate for them - A life goal can be buying your first home, getting a car, children’s education, building a retirement corpus, etc. A disciplined approach can help you achieve your life goals. Once you know how much is available for saving every month. Initially, start making allocations for the ones on top of your priority list.
Review and update - The only certain thing about life is, it is uncertain. Any life event- a new family member, new job, salary hike, everything mandates a review and updation of the budget. Who knows whether you can pay back the housing loan sooner or can finally go on the international trip you were waiting for? Even though there are not many life changes, it is advisable to revisit the budget every 2 months.
We are about to discuss the second part of the two-fold problem. Many of us plan a budget but struggle to stick to it. Here are some of the common mistakes people make when it comes to budgeting.
How to stick to your budget?
Underestimating expenses - This is the most common mistake individuals make while planning a budget. This can be due to various reasons.
Omitting certain expenses - Chances are you would have missed to include something while listing down the expenses.
Trying to cut down hard - Our mentality to save every penny can sometimes lead to cutting down our basic needs, which is not sustainable in the long run.
Not accounting for some of your wants - It is not a crime to have fun and compromising too much on the joys of life would eventually reduce your morale to stick to the budget.
2. Lack of an emergency fund -Budgeting and keeping an emergency fund goes hand in hand. The primary goal of budgeting should be to build an emergency fund. A misfortune like job loss or sudden medical expense can sabotage your planning. Hence, it is always prudent to maintain an emergency fund which comes in handy under such circumstances. It is advisable to have an emergency fund which can at least meet your expenses for 6 months.
3. Lack of commitment - Let us be honest, budgeting is not a fun process. It is boring and oftentimes scary. But, there is no alternative for it when it comes to financial planning and you need to get it done somehow. Try having an accountability partner to keep you on track like a friend or relative. Envisaging your life once you achieve your life goals also can be a pretty good motivator.
4. Set realistic life goals - Prioritise your life goals and avoid lofty & unachievable goals. Adopt the SMART framework - Simple, Measurable, Achievable, Relevant and TimeBound while identifying goals. Breaking down your bigger goals into smaller milestones will keep you motivated to keep track of your planning. In addition, keep realistic return expectations from your investments and always make room for unexpected losses.
5. Family should be onboard - Getting your family onboard with the planning process is extremely important. Because they can help you keep a check on the family’s expenses and eventually become your motivator. If they are not on board, educate them about the need for budgeting. Identify each individual’s personal goals and help them understand how budgeting will help them in Realizing them.
6. Keep a check on your credit card - It is very easy to go overboard with expenses if you have a credit card. A credit card is a person’s best friend when in need. But if you miss the payment date, it becomes your worst enemy. Many financial gurus would suggest you to use credit cards to get the benefit of credit card rewards. Navigating the terms & conditions, hidden charges and making optimum use of a credit card is tricky. It is better to do away with the hassles.
7. Create auto debit to your investments -After a couple of months, your budgeting process will be finally on track. By this time, you would have correctly identified your needs and wants. You would be saving almost the same amount by the month's end. At this stage, take a step ahead and automate the investments for your life goals at the beginning of your month without waiting for the month's end. This will not only ensure investments towards your savings but also prevent unwanted expenses.
8. Review and repeat - We have already covered this in the first part. We are keeping it here just to reiterate the importance of this step.
Final thoughts
Remember, budgeting is a quintessential part of your financial planning journey. Reviewing your budget at regular intervals and during major life events is a non-negotiable. Staying committed to your budget and making disciplined investments would eventually help you secure your financial goals.