You know what used to scare me? It's something that probably scares a lot of people who never learned how to start planning a budget.
Here it is:
Logging into my online banking account. Yep It scared me always. I used to spend a lot on recharges, movies without actually keeping track of how much have I spent and how much is actually available for my investments for the future or even emergency fund.
Why was I scared of this?
Because I never used to keep track of how much money I was spending (I also used to waste a lot of money on fast food).
But since establishing a budget, I know exactly what is going to be on my credit card bill each month and have no stress when logging into my online banking account.
I want you to feel the same way, stress-free.
What exactly is Budget?
Budget is a plan for your money. Simply, budget is the answer to all your financial expense tracking. Without a budget, you're going through each month blind and hoping you still have enough to pay rent at the end of the month. Having a budget will allow you to accomplish financial goals, eliminate debt, and have fun too! Yes, that's right you can still do fun things when you have a budget.
Think about this:
What if your laptop broke down tomorrow, would you have money to fix it?
What if you lost your job, would you have enough in the bank to pay rent while you find a new one?
What if you have no income source, like the one during coronavirus lockdown in the world, did you have an emergency fund to bear your running expenses?
So, how do you prepare?
Learn how to start a budget of course!
But first:
Why You Need to Start a Budget
Everyone will benefit in a different way from budgeting; some may just want to feel more in control of their finances, others may be doing it to eliminate their debt faster. If you're reading this you probably already have your reasons for starting a budget.
However, if you're still unsure of the benefits of budgeting, here are three big ones:
- You'll be prepared for tough times – Life is a … you know the word. One of the best things you can do when you start budgeting is to establish an emergency fund. Car problems? Lockdown problem? Emergency problem? Not a problem because you've already prepared for all of it.
- You'll accomplish your goals faster – Do you want to go to the Santorini or go for a vacation trip to Ladakh but you never seem to have the money to do so? Create a spot in your budget to start saving money each month until you reach your goal.
- You'll never wonder where your money went – If you find yourself wondering where your money went or how your credit card bill is so high, with a budget, you will know the answers to those questions.
How to start? Here we go.
Step 1. Figure Out What Do You Make
Can't make a plan for your money if you don't know how much you have to work with.
If you have a fixed income (same amount every month), this will be easy for you, just add up your paychecks.
If you don't (commission based pay, tips, sales, etc.), try to estimate the minimum amount you make each month.
So here's an example:
| Source | Income |
|---|---|
| Job | ₹65,000 |
| Rented property/vehicle | ₹10,000 |
| Freelance Writing | ₹2,000 |
| Total Income: ₹77,000 | |
Step 2. Set Goals For Your Budget
This used to be one of the last steps in this budgeting guide, now it's one of the first.
Why?
Because this is one of the most important steps when starting a budget. It's one of the main reasons to start a budget in the first place.
To accomplish financial goals.
Your goal could be to save ₹1,00,000 for a trip to Santorini.
Try to come up with a mix of short-term (less than a year) and long-term goals (over a year) that you would like to accomplish financially. Doesn't matter how big or small just write them down.
Here are some examples to help you get started:
- Set up an emergency fund. An emergency fund can be a lifesaver when something unexpected happens like coronavirus lockdown. You should aim to make this emergency fund big enough to last 6 months to a year of unemployment.
- Pay off debt (if you have any).
- Save for retirement.
- Save up for something you've wanted for a long time, could be a vacation or a new TV (just because you're budgeting doesn't mean you can't have fun).
- Investments. Now that you're saving some money you can start making it work for you. We’d come up with some cool ideas for investment plans soon and share a link here.
After you come up with a couple goals you're happy with, move on to the next step.
Step 3. Add Up Your Fixed Expenses
Fixed expenses are the expenses that stay the same every month. This includes things like car EMI payments, rent, bills, etc. These expenses are not easily changed so you'll have a hard time finding savings here.
Example:
| Expense | Cost |
|---|---|
| Car EMI | ₹15,000 |
| Rent | ₹10,000 |
| Total: ₹25,000 | |
Now, Subtract Your Fixed Expenses From Your Monthly Income
Since our monthly income is ₹77,000, we're left with ₹52,000 after paying for our fixed expenses. We will call this ₹52,000 our true budget.
True Budget = Income – Fixed Expenses
Step 4. Figure Out Your Variable Expenses
Next thing you need to do is add up your variable expenses. These are the ones that change each month and include things like entertainment, dining out, clothes, credit card bills and all that fun stuff.
This is where you cut back and find savings if you need to.
How?
When you're looking through your bank account(s)/credit card bills and adding up your variable expenses, you'll find expenses that fit into two categories:
Needs and wants.
Your needs could be things like gas and groceries. You can find some savings here if you really need to.
Your wants could be things like a music subscription, dining out, and Netflix, etc. You can find more savings here, you just have to make some sacrifices. For example, if you dine out a lot, try cooking at home more.
Here's an example of variable expenses:
| Expense | Cost |
|---|---|
| Gas | ₹2,000 |
| Groceries | ₹7,000 |
| Dining Out | ₹5,000 |
| Movies | ₹2,000 |
| Total: ₹16,000 | |
Step 4b. Subtract Your Variable Expenses From Your True Budget
So after adding our variable expenses and subtracting them from our true budget, we're left with ₹36,000 extra to put towards our goals. If you have a lot of extra money like this, great job! This means you're already doing a good job managing your money. Continue to the next step.
If you are breaking even you've got enough money to survive, but nothing to put towards goals. You may want to take a look at your variable expenses and try to adjust so you have some extra income for the next step.
If you have a negative number, then you're losing money every month which is unsustainable. Adjust your budget for your variable expenses or try to increase your income.
Step 5. Distribute the Rest
In step 2 we made financial goals, now it's time to distribute our extra income into those goals.
You want to make sure each and every rupee you make has a purpose, so try to use up every penny left in your budget!
Example:
| Goal | Monthly Contribution |
|---|---|
| Retirement | ₹7,000 |
| Pay off debt | ₹10,000 |
| Save for vacation | ₹7,000 |
| Invest | ₹5,000 |
| Emergency Fund | ₹7,000 |
| Total: ₹36,000 | |
We've now assigned every penny in our budget a job. Things will obviously fluctuate as life is full of many surprises, but at least we have a general plan for our money.
Conclusion
Congratulations! Now that you know how to start a budget there's nothing to stop you from starting your own.
The truth is, learning how to start a budget is the easiest part of budgeting. ACTUALLY taking action and doing what it takes to start your budget and stick with your budget is the hard part.
