How to create, monitor and stick to a budget
A budget is a very effective tool for managing your personal finance. It analyzes your cash flows and makes you aware of your lifestyle expenses. A great amount of discipline can be inculcated in your financial life if you follow it on a regular basis.
Still most people find it difficult to follow any kind of budgeting knowingly or unknowingly.The fear of curtaining lifestyle expenses is also a factor which makes people avoid this simple tool. Sometimes ignorance on your cash flows can leads to bigger problems in later years of life impacting your financial well -being.
Create a Budget
Creating a budget is no rocket science but awareness on what you have earned and where you are utilizing the funds. Income is easy to identify but one has to work in detail for identifying the different type of expenses incurred for maintaining the lifestyle one is living.
Income: Income has many components some of which are variable like bonus and some are deducted on basis of the prevalent guidelines like PF. Your employer offers you CTC but it’s the income in hand or income which you receive in your bank account that runs your monthly budget. For practical purposes, take net income and avoid adding surplus which is based on your performance, like bonuses. Add income from all sources like rent from property, income from your investment and any other income which is not a part of your employment.
Expense: On Expenses front you have fixed expenses like Rent, Utilities, school fees etc.which can be easilyidentified while variable expenses like entertainment and gifts can be identified only after following them for few months. Create different heads like house, utilities, Food/Clothing/Transport, Education and Miscellaneous and list your expenses in each of the categories .A good exercise would be to collect bills for your variable expenses for few months which will give you an average monthly expenditure on such items. Convert expenses which you incur annually or quarterly in monthly amounts as you receive your income monthly.Although professionals and businessman have irregular income, creating a monthly budget for them becomes even more necessary. To ensure budgeting meets the objective, identifying expenses which may not matter currently like spending on cigarettes for smokers, is important.
Monitor a Budget
There are so many expenses you incur but do not keep records. Even some fixed expenses like mobile bill changes frequently depending on how you make calls, month on month. Hence, you are not able to identify clearly the reason of increase in your overall expenses. By monitoring a budget you can find out the changes in your family life style expenses. This not only gives you a real picture but also helps you in taking appropriate measures. For starters monitoring budget rigorously for next six months is very important to identify the correct amount of expenses. After 3-4 months you can get near, if not accurate picture of your expenses and can identify where improvement is needed. Once you have made the improvements and appropriate measures have been taken, rigorous monitoring will still be required till you bring that discipline of not going overboard. A good idea will be to divide expenses between you and your spouse for monitoring. If you are the major income earner, you would like to have fixed expenses going from your income. Assign tracking variable expenses to your spouse so that mistakes can be avoided.
Stick to a Budget
Sticking to a budget is a very difficult at times for some people, as it requires curtailing lifestyle expenses. But to bring discipline to your finances this is the most critical part of budgeting. You have identified all expenses and have taken appropriate measures. Now you have to stick to the budget by avoiding unnecessary expenses which you were incurring previously. If you have divided monitoring of expenses between you and your spouse you will be able to focus on specific matters. This way you will be able to stick to your budget as your partner will identify when you have done out of your pocket expenses. Mistakes of going overboard on your expenses can be avoided if both partners are involved in family financial matters.
A budget is a balance sheet which gives you analysis of your revenue and expenditure and how much profit you are making. Companies use it quarterly to track their performance and plan ahead. Governments use it to track how they have performed and what measures should be taken to bring finances under control. Similarly, an individual should use it to find out the problem areas and take appropriate measures to manage their financial well being.