A personal finance budget is important to find out where your money goes, and how much of a monthly deficit / surplus you have.
Step 1: Identify your goals/dreams
What are your financial goals? Are you planning to go on a vacation? Are you planning to buy a house/car? Do you have debts you need to pay off? Budgeting involves tough choices, but having a goal will make budgeting a little less painful.
Step 2: Unravel the mystery of where all your money goes.
Do you check your bank account at the end of the month and wonder where all the money went? Before you can manage your money, you have to know how you’re spending it.
Use an excel file to track and categorize your expenses for one month. Get in the habit of recording your expenditures once a day.
It’s useful to separate your expenses into three categories:
- Fixed Needs – Necessary expenses that stay the same from month to month, e.g., rent, phone bill.
- Variable Needs – Necessary expenses that may vary from month to month, e.g., petrol expense, food.
- Discretionary Needs – Nonessential expenses, e.g., movies, eating out.
If you have a monthly savings goal (and you should!), include it as an expense. It is much easier to save money if you’ve planned for it in your budget.
And it’s important, too: if you run into unforeseen expenses, you’ll want to be able to pay them without going into debt. And even if nothing goes wrong, having some savings will help you follow your dreams in the future.
Step 3: Identify your sources of income.
Where does your money come from? List the sources of your income (e.g., work, rent, pension plan) and the amount that comes in from each source each month. It is always a preferred option to look at after tax income that will be available.
Step 4: Add it all up.
When you compare your income and expenses, do you have a monthly surplus, or will you need to lower your standard of living.
If you already have a surplus in your budget, congratulations! You can invest in your future.
On the other hand, if your expenses exceed your income, step 5 will help you make some adjustments.
Step 5: Make adjustments if needed.
If you’re over budget, you need a strategy for controlling costs. Balance your budget, starting with the “discretionary expenses” identified in step 2.
When you added up your monthly expenses, did you notice any surprisingly large numbers? Did you spend Rs 5,000 at restaurants or on yet another new outfit? Did you spend more on electronics than food?
Begin with such “discretionary expenses” that you may be overindulging in. For each type of “discretionary expenses,” decide on a reasonable monthly limit that will help you balance your budget.
Set a cap on your “discretionary expenses” expenses and see if you’ve balanced your budget.
If you can’t trim enough from your “discretionary expenses” in order to balance your budget, you will need to reduce your variable needs expenditures in the short term and perhaps your fixed needs expenditures in the long term.
This may mean taking the bus instead of driving and finding less expensive house to rent next year.