Where Does All Your Money Go?

The writer is a Delhi, India based Certified Financial Planner CFPCM, conferred upon by the
Financial Planning Standards Board. If you are an Indian resident looking for a financial plan prepared according to your needs & goals, write to her at shruti(AT)richesawait.com
The Importance of Budgeting

Even after working so hard for your money, you never seem to have enough of it. Well, the problem is not your earning but spending. And the easy solution is Budgeting.

Budgeting is simply creating a plan to spend your money. It’s a way to ensure that you don’t spend more than you have and avoid spending more than you need. Budget is an important part of money management.
A budget makes sure you are able to live on what you earn. It helps you understand how much money you have and where that money is spent. This skill of money management will lead you to financial success.

How to create a budget

The purpose of a budget is figuring out how much you are making and how much you are spending each month.
To create a good budget, start with a spending journal. When you start writing down each and every expenditure you will get a clear picture of where your money is going. You can also choose from a plethora of apps available for smartphones to record your expenses.

When you see that expenses like buying bottled water or lunch during office hours are creating a big hole in the long run, you might start bringing water or lunch from home and save on this unnecessary expense.

Once you get a hang of your expenses, start by creating a monthly budget and then stick to it.

All you have to do is add up your monthly income from all the sources  & calculate your monthly fixed expenditure (like utility bills, rent or EMI, etc).
Subtract the fixed expenses from monthly income. They should not take more than 50% of your income. If your fixed expenses are more than that, then you are living way beyond your means. This can lead to financial trouble in future. You need to make serious adjustments to start living within your means. You can not suddenly increase your income but you CAN reduce your expenses.

After subtracting the fixed expenses decide how much you want to put into savings and how much you want to spend on. It’s advisable to contribute between 10% and 20% of your income towards saving/investing. If you start a SIP a fixed sum of money will be deducted from your account automatically every month and you eliminate the chances of wasting that money on short-term material gains.

Once you are done saving, you can divide other expenses into different categories like Grocery, Clothes, Eating out etc. And decide how much you want to spend under each category.

Why make a budget

  • Gives you control over your money
    Proper budgeting helps you gain control over your money. You get to direct the flow of money, instead of following its trail and working with what’s left. It gives you confidence and clarity.
  • Keeps you out of debt
    Knowledge is power, and a budget being a structured plan tells you your exact financial situation. This knowledge will stop you from spending money on unnecessary things & keep you out of debt and other financial troubles.
  • Helps you make better decisions
    Once a budget is in place you make better spending decisions. It helps you decide if you want to sacrifice instant gratification of eating out in exchange for a long term benefit like a vacation overseas. Budgeting does not stop you from enjoying luxuries, but it ensures that you enjoy them when you want it.
  • Helps in prioritizing
    The focus of budgeting is prioritizing. It shows you how to cut expenses that are less important to you so that you can have room for things that really matter.

“If you buy things you do not need, soon you will have to sell things you need.”
Warren Buffet

How to make your budget a success

  1. Make it fun
    Rather than thinking of it as a task, try and see it as a challenge. Involve your friends and family members in this. And turn it into a game by seeing who sticks to their budget the most.
  2. Be realistic
    Let’s say your monthly income is ₹60,000 but your budget adds up to ₹70,000. It will not work over the long haul, will it? Also, don’t reduce your lifestyle expenses (like dining out, going to the movies etc) to nil. You will only end up ditching your budget. Be realistic and start by reducing the number of outings to twice a month from twice a week and so on.
  3. Know what you are saving for
    People opt for spending instead of saving because they don’t understand what they are saving for. Start by saving for an emergency fund. You must have at least 3 to 6 months of expenses saved for in case of emergencies. Move forward from that and start saving for completing items from your bucket list like cruise vacation, comfortable retirement etc.
  4. Turn your savings into investments
    If you turn your savings into investment and start seeing the growth of your money you will start saving more to increase the value of your portfolio.
  5. Be self-disciplined but open to change
    Follow the budget and stick to it. But if need be, change things around. Let’s say you allotted 12,000 a month to groceries and household items. A new store opened nearby and they offered great introductory promotions. You were able to fulfil your monthly requirements for ₹9,000. Now you are 3,000 under budget. You don’t have to buy extra to meet your allotted quota. You can use the remaining 3,000 for savings or eating out or buying a new gadget that you had your eyes on. It’s up to you.
  6. Don’t give up
    If your current financial situation is not to your liking, don’t lose heart. A budget is a work in progress. All you have to do is monitor and tweak your budget regularly and it will help you achieve your goals.

Start with the 50-30-20 rule & then tweak your budget to suit your needs.
Dedicate 50% of your income to essentials – rent, utility bills, groceries etc. – stuff you absolutely need.
30% to personal – things you don’t absolutely need but they’re nice to have like a gym membership, going to the movies etc.
20% to savings and investments.

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