Personal budget is an art, mastering it can make you a financial exemplar
What is personal budget? A budget created to channel our personal expenses. Everyone loves to save money, but only few succeed. Why is that? That’s because of lack of planning. There is a saying ‘a work planned can save 20% of your time and energy’. The same applies to saving money. A planned spending can save you thousands every year (Even lakhs if you spend a lot)
So, how to channel my spending? The only solution is budgeting or creating a personal budget. A budgeted spender saves 20% more than an unbudgeted spender. Budgeting gives you excess money to invest every month, investment gives you higher returns and higher returns gives you financially secured future.
Before creating a budget
How to create a personal budget? What are the budgeting rules to follow? How much should I save every month? Questions are endless, but before we create a personal budget it’s necessary to understand our monthly expenses.
Take a month to record your expenses. Start recording from the first date of a month till the last date. Make sure to record each and everything you spend on. You should not miss even a match box or a chewing gum. Everything should be included in the record.
You can either record your expenses through a mobile app or a small note book. I prefer the classic method of carrying a small notebook, since it makes us conscious about our expenses than a mobile app. You can select your preferred method.
Once you complete a month of recording you are ready to create a budget. When it comes to budgeting there are many budgeting rules in existence. Each has its own pros and cons. I have listed a few budgeting methods (rules) here, you can select the one that suits you.
This is a well known budgeting method and it is in existence since the dawn of money. Creating a classic personal budget is quite simple. First look into the record you have created for a month, segregate the essential expenses or your needs like groceries, home needs, monthly bills and other essential expenses that’s needed for our living. These expenses cannot be reduced or modified, just allot the same amount for these expenses in your budget.
Second find the expenses that are your wants or the ones those are not essential, but useful like subscribing to a streaming service, snacking outside, book and magazine expenses and others. These expenses are not essential but the money spent here are not wasted as well. So before including them in the budget, figure out the unused services or subscriptions and cut them down from your expenses. As per my experience, I buy too many magazines but by the end of the month I might have studied only few pages of each. That goes with the streaming subscriptions as well. So cut down the unnecessary ones and prepare a final list of necessary expenses and add them to your budget.
The final part is very simple; find the expenses that are neither essential nor useful. Like having a coffee while waiting for a friend, eating out without the necessity to do it, purchasing a mobile cover though your old one is still fine and other similar expenses. Cut down these expenses from your budget.
Now prepare the final list, that’s your budget. Now stick to the budget throughout a month and count the remaining bugs, you will be surprised with the lot.
50/30/20 rule is popular among those who have calculative approach towards their budget. Creating a 50/30/20 personal budget is simple and effective.
The first step is to calculate your income for a month. Reduce the taxes if you pay any. The next step is to segregate the amount into three parts, 50% of your income as one part, 30% as another and 20% as the final part.
Now the first part that is the 50% of your income goes to your needs or essentials like groceries, home needs, bills, food and other expenses. Make sure you include every essential expense in this category.
Second part, the 30% of your income goes to your wants or non essential but useful expenses. It is not compulsory to spend the entire 30% under this category. It can be reduced if possible.
The final 20% goes to your savings or investments. Plan your savings that yields you better returns in longer term.
Through this rule you can save minimum 20% every month, which secures our future. 20% a month is quite huge on the longer term.
Envelope rule is actually not a budgeting system; it is a practice to control our impulse spending or over spending. Just club the classic budgeting or 50/30/20 rule with envelope rule to keep your spending in check.
How to do it? Once you fix your budgeting rule be it classic or 50/30/20 rule segregate each category of expenses and create an envelope for each. Now withdraw cash from your account and fill the envelopes with the budget money of each category.
Whenever you make an expense in each category spend the money from the envelope that’s marked for the category. For example if you want to buy groceries you have to take cash from the grocery envelope not from any other envelope. Once the envelope is empty you cannot spend money under this category.
The idea is to make cash payments instead of cards. Why is that? Cash payments make us conscious about our spending. Envelope rule is extremely handy when you can’t control impulse or over spending.
It’s a very simple budgeting rule, which suggests you to zero your money by the end of every month. How it is done? You have to create a budget for every penny you earn in a month. This should include essential and non essential expenses and savings.
The idea behind the method is to start every month afresh. This would give you a clear headed approach on your finance. The baseline, don’t budget the entire income into expenses, plan a few investments which can yield you better rewards.
One thumb rule is that every budget should have an emergency fund category. This would help us during emergency situations. If possible allot a small amount to emergency fund every month.
Budgeting is the first step to saving money, but it’s difficult for those who are new. So club your budgeting rule with envelope rule to control your spending. Through this you can control your money from being robbed by unnecessary ads and impulses.