Financial Culture: Understanding Budgeting
by Akshata Mehta
Budgeting - it’s something we are all told to do, yet rarely ever gets done. Most people have a slight grimace on their face when hit with the thought of organizing their finances into one neat little budget.
Personally, having various expenses (and not a lot of money) in college forced me to learn to budget effectively. To my own surprise, I found that budgeting could actually be somewhat fun, leaving me with a feeling of contentment and satisfaction. If you’re anything like me - always yearning to travel, or saving up to buy some new books, shoes or clothes - then trust me when I say that budgeting will really help you reach whatever goals you may have that involve money. In fact, budgeting is one of the easiest ways to start saving money. Here are the basics on how to successfully create a budget for yourself:
Monitor your spending
It makes no sense to assign some arbitrary numbers to your expenses, and then try to manipulate your spending to fit those numbers. Rather, the first step of budget creation is to track your spending. Take note of how much you spend in a given month - everything from paying rent to buying your friend a gift - keep a thorough record of all your expenses.
Sort your expenses
After you have monitored your spending, take some time to sit down and sort out your spending. Start with two broad categories, “fixed costs” and “flexible spending”. Fixed costs are things that you will spend on each month, with little variance in the amount. These include rent or mortgage payments, phone bills, internet bills, car payments, gym memberships etc. Flexible spending consists of spending on things that can vary from month-to-month. These include eating out, shopping, entertainment and even groceries. Even though groceries are a necessity, the amount you spend on them can vary significantly from month-to-month, and so they are included in flexible spending. Then, on another sheet of paper, consider what is essential spending versus extra spending. This will help you create budget values later on.
Consider your monthly income
The object of budgeting is so that you don’t overspend. Rather, budgeting should leave you with more savings than before. It is integral to consider your monthly income while creating your budget. Even though this seems obvious, there is a shocking number of people who don;t track their income and thus spend more than they can afford, without even knowing it.
Consider your financial goals
Write out any and all financial goals you may have. Do you want to pay off a loan by a certain time? Do you want to buy a new car? Writing out your goals will help you define your spending priorities. As stated by Martin Siesta, a Certified Financial Planner for Compass Wealth Management in Maplewood, New Jersey, “You can't have everything you want, but you can direct your dollars toward things you want the most.”
Consider your savings
As a rule of thumb, you should always save for a rainy day. In general, financial planners recommend setting aside three- to six-months' worth of living expenses for an emergency fund in case of job loss, illness or an unexpected bill. You might also want to consider setting aside a certain portion of your monthly income towards retirement, especially if you have plans to retire in another city, or even abroad as research shows that this can be quite costly and requires advance planning.
Eventually, you may even be able to invest your savings in the stock market, and make a significant profit. If you are into startups and venture capital, you could consider investing in these, although this tends to be more risky. Be sure to carry out appropriate research before moving forward with investment options.
Put it all together!
Now that you’ve considered the main aspects of your personal finances, it’s time to put it all together. You can either create an Excel Spreadsheet, or even use a physical accounts book. For the tech-savvy, there are many accounting programs you can download to your computer, and plenty of apps that will help you access and track your budget anytime.
Allocate an amount to all of your fixed costs such as rent, bills etc. be spreading them out into various sub-categories. This should be based on your actual spending and you will have to spend these amounts each month. Similarly, I like to allocate a lump sum towards groceries, even though the amount I spend on them varies by month. I allocate a slightly higher figure, knowing that if I spend less, I will put the remainder into my savings. Then, allocate a certain amount that you will set aside to meet whatever financial goal you choose. Based on what you have left, allocate a certain portion of your income towards your savings. From the start of the following month, put this portion of your income into your savings before spending on any other miscellaneous expenses. Ideally, this shouldn't harm your budget since this portion was allocated while keeping in mind all your expenses and goals.
If you find that your expenses outweigh your income, you need to look at areas where you can cut down spending. Most likely, you will find some places in your “flexible spending” or “extras” where you will be able to save some money. Often times, if you are thinking of engaging in a large expenditure (buying a new car, or a holiday) in the future, you will have to significantly reduce spending in other areas. These are very “give and take” like situations - but in the long run, that holiday will have definitely been worth it! All in all, you have to remember that you will only be able to stick to your budget if you are living within your means.
Akshata is a 23-year old who is healthily obsessed (or so she believes) with all sorts of planning and management. As a certified scuba diver, she has had the privilege to be a part of some exciting adventures. In her spare time, she writes about travel, food, and her daily doings on her blog The Happy Ranter.