Ever since our childhood, we all have heard our parents say “For everything, there is a budget” or “We don’t have the budget to purchase this” or “This car is out of budget” etc. So what is this budget that we have been hearing since our childhood and why does it matter so much?
It is one of the most important components of your day to day financial planning. Be it a multimillion-dollar company or a simple household, everyone prepares a budget and functions according to it. We all ourselves prepare a budget every day in our lives like we divide our income into different components from traveling to medical to luxury expenses like a brand new cell phone.
How Do Budgets Help You
Budget is an expression of a plan for a defined period usually a year. It allows you to set up permits that you work out earlier whether or not you may have enough cash to realize your wishes or targets you would like to achieve.
If you don’t have the means necessary to realize those dreams or targets of yours, a budget also helps you prioritize expenses for the most important goals and also ways to achieve them step by step.
Why is Budgeting Important
Budget is prepared to help us plan, control, and track how much money we earn, spend, save, and invest. Without a proper budget, our finances will never be organized and we can never prepare ourselves for medical emergencies, debt, long term goals, etc.
Steps to Create a Budget
- Track Your Income and Expenses: Tracking your income and expenses is very crucial before you decide to set up a budget. A simple entry of income or outgoing, creating a budget on excel, is very important to get an overall idea of how exactly you are supposed to manage your finances.
Example: A money journal can be used for this purpose: This can be anything from a notebook and pen, a spreadsheet, or any offline app. - Set Your Income Baseline: The most important question here is how much can you afford to spend? Here you find out various income sources from employment, money saved for college, family contributions, grants, etc. Credit cards are not to be considered as a form of income. All the above sources define your income baseline.
- Determine Your Expenses: Figuring out your monthly or annual expenses is very important as it helps you track how much portion of your income is utilized and how much can be set aside for future goals and savings.
There are different ways in which this can be done:
- Looking back on your previous years or months expenses.
- Looking forward to creating a chart of your fixed expenses like rent, electricity bills, EMI’s, etc.
- Categorize your Income and Expenses: In this step you subdivide both your income and expenses into subdivisions so that you know exactly where your income is utilized, thus allowing you to control and eliminate unnecessary expenses from your budget.
- Make plans for Future Expenses: It is very important that you start planning for your future expenses today. Start by cutting down on your expenses so that you have adequate income left for future expenses. Your budget allows you to divide your income perfectly for any future contingencies.
- The 50-20-30 Rule: Always design your budget based on this rule. 50% is for essential expenses like groceries, housing, transportation, etc. 20% is for savings and paying off your debt, and the last 30% should be for lifestyle choices like a brand new cell phone, entertainment like movies, or going out for eating, etc.
Why is it Important to Automate Your Budget
You have seen and understood how important it is to create and have a budget in our day to day lives. Without a proper budget it will be very difficult to track our expenses and also to save for any future dreams or targets you want to achieve or for that matter any contingent expenses arising in the future.
It is important that you keep your budget updated at all times because if the budget is not updated with necessary changes in your income and expenses then it may be useless as the budget would suggest the wrong amount of accumulated savings and thus the whole idea of an adequate savings plan would collapse.
What you can do is to take assistance from a financial management application which can help you automate your budget. It will also help you keep a track of your expenses on a daily basis along with keeping a track of your incomes as well. It also allows the user to set specific life targets which you want to achieve like buying a new bike or a dream house, saving for your marriage or future education. It helps you make small contributions and also helps you eliminate loopholes in your budget which is eating up your savings.
