A budget helps in keeping spendings in check. It helps people to keep track of the money they earn and spend. ‘How to budget’ is the first lesson of financial freedom, followed by ‘how to save and invest’. When so many people already know how to create a budget and understand how important it is for managing finances, then why most of them fail to live by it? Why their budget fails them?
Budgets fail because most people, including financially educated ones, fail to realize that budgeting is not a strangling activity. Post budgeting, you shouldn’t feel caught up rather relieved and relaxed! People have a tendency to make rigid budgets, which are a sure recipe for failure. A lot of times, people give up on budgeting after their first experience.
Remember, a budget is like a doctor, not a butcher. This is an excellent analogy. When you go to a doctor, he asks you the problems and symptoms you are experiencing and then diagnose the diseased areas, followed by giving you the medicine to eliminate the problem. Instead, a butcher just slays whatever’s in front.
You don’t have to slay your expenses like a butcher. Debt makes one do that. A hurling debt is already a limitation towards your expenses, then why to create another limitation in form of budget. I am not saying don’t have a budget or don’t cut-down on expenses. But, you will continue to default and fail until you change your approach towards budgeting. You need to diagnose your spending habits like a doctor. You need to see which your problem areas are. Budgeting is not a mere how-to-guide to control expenses; rather it is a plan to get in control of your money.
Finances are best managed when breathing space is left between rules and execution. Let’s learn how to create a good budget:
- Make budget a lifestyle change
Budget needs to be viewed as a lifestyle change instead of a strict diet. Diet brings self-deprivation, but lifestyle changes bring sacrifices. That’s the difference. When we follow a diet, we stop following the specifications of that diet as we meet our targeted weight. And as soon as we move to our old habits, we find ourselves caught in the same mess again. But when lifestyle changes are brought, they are permanent. They are to stay. They are brought with an approach so as to make them a part of life for forever. Budgeting should be viewed in a similar manner. A diet budget will lead to strangulated cutting down of expenses, which may work in short-term, but you are bound to get frustrated and move to past habits. Budget doesn’t have to become a burden. Let’s not convert it into another obligatory debt for ourselves. A more planned budget would be a lifestyle budget. It will be compatible with your requirements.
The key to bringing lifestyle changes in budgeting is to distinguish between our needs from our wants. Write down your wants and needs separately. Distinguishing between needs and wants will be your first step towards diagnosing the problem with your spending habits. It will help you understand what are the expenses, which you can cut (from wants) without being a butcher.
REMEMBER, Spending isn’t evil. Ultimately, we earn so we could spend on ourselves. But planning our spending will go a long way in growing our money.
So, how can you cut on your wants? Let’s say you want to buy a luxury car of the sorts of Mercedes or BMW. But, lifestyle budget would say, you can rather buy Hyundai if it fulfills your needs.
If you go out to watch movies every weekend, then for at least three weekends of every month, you can choose to cuddle up on the sofa with your partner and watch a movie with popcorns at home only. It will not only be comforting, but will also be an exciting change.
Similarly, in case cable TV does not figure in your needs section, then you can cut your cable expense and start a habit of watching TV channels on internet (You Tube, Netflix) instead.
- Examine financial goals
A budget should allow you to understand not only your spending threshold, but also your financial goals. A good budget is based on some goals. At this step, you need to figure out your financial goals, both long term (owning a house, start saving for retirement and kid’s college education) and short term (buy a laptop, invest in Mutual Fund, take family out for vacation, increase savings by 20%) financial goals. Now, you need list your goals on the basis of your priority. Note, you can add two goals on the same priority. Also add the amount needed to be saved for completing each goal. This will tell you how important which goal is to you and how much work you need to do.
- Gauge present scenario
Now, you need to figure out your current monthly income and expenses. Make a list of your sources of income (salary, dividends, interest, money from government security, etc.) and present expenses. To simplify the expenses section, divide it into four sections, i.e. Fixed Expenses, in other words, needs (housing, EMI, rent, food, etc.), Discretionary Expenses, in other words, wants (vacations, entertainment, etc.), Emergency Expenses (repairs, maintenance, gifts, medical, etc.) and Goals Fund (contribution for goals).
Now, add up these expenses and compare your income with expenses. If your income is higher than expenses, then you are doing well. Still, if you think you can improve your condition by cutting on unnecessary expenses, do that. Now, you would need to find profitable ways to invest the extra income.
If your expenses are higher than income, then you will need to cut down on your wants section drastically. I am not saying don’t invest a penny into it. If you are investing 50% of your income in this section presently, then don’t spend more than 10% in it. Look for creative ways to enjoy your wants in lesser expenses. Another way to balance your expenses with income is to increase your income by getting a second job (part-time), like babysitting, selling crafts, etc. or doing some freelancing.
In both cases, do keep your financial goals at vantage point when deciding on how to invest extra income (in case of former scenario), or how much extra do you need to earn (in latter case).
A good budget is the key to a successful financial future. Going nuts and bolts about having a budget will make this practice a burden. Don’t do that. A doctor won’t stress you if you have high fever. Understand your money instead of spiking your blood pressure. Don’t go frantic, if you aren’t 100% successful. Ask yourself, why you failed and what you need to change. Don’t get intimidated by the practice. It’s an exciting journey to get in control of your own life.
A good budget is which requires least record keeping.