Money saved is money earned
We have read this quote innumerable times and even tried to incorporate it in our lives. We very well understand the importance of saving money and the same has become even more relevant in current Covid-19 situation. But despite of that, many of us fail to actually save money and continue to live on paycheck to paycheck basis.
The root cause of the same is we fail to track and control our money. Our money related decisions are usually impulsive in nature, rather than being proactive. As a result many of us might end up staring at completely depleted bank accounts at month end. However, we know that this must stopped, but how?
The answer to that is to have a complete control over your money and which can be achieved by creating a budget. Budgets will not only help you to plan your expenses,but also help to track the consumption pattern and avoid unnecessary expenses.
A simple personal budget can be prepared by following the below steps:
Make a List of Your Income
As a first step, make a list of all sources of income available at your disposal. Usually the most prominent source of income is from salary. However, other sources include monthly rent, capital gains from equity/ mutual funds, bank interest etc.
Make sure you make all necessary deduction that might hit your income like salary deduction for your leave from work, if any etc.
Determine your target savings
One of the most common mistake we do while managing our finances is that we try to save after we have managed our expenses. But several financial principles state that "Save First and Spend Later".
Our target savings can be dependent on multiple factors such as goals, time frame, requirement of funds etc. We can always start with small savings, say Rs 50 per day and increase it subsequently.
List down your expenses
Once you have determined the net disposal income after savings, move ahead to plan your expenses. Prepare a list of all the expenses that comes into your mind. Planning a birthday gift for your best friend? Excited for the upcoming release of your favorite actor? Bonding with group member over lunches?- List each of them as your expenses.
Prioritize your expenses
Once you have listed all fixed and probable expenses and compare it with the funds available. If you still have excess funds- congrats you can save more! But if your expenses are more than available funds, you shall need to trade-off and prioritize your expenses in the nature of importance. Expenses such as rent, utility bills, groceries, travelling etc are usually fixed and non avoidable. They get the first preference in expense planning. Next try to identify expenses which can be completely avoided or postponed. Also try to identify expenses which can be reduce by changing certain factors such as time or place. Also try to maintain buffer or emergency funds because life usually do not runs as planned.
Compare with actual
Once you have finalized the budget, make sure you compare with the actual expenses incurred at regular intervals. It will help to identify any deviations from the planning and you can make necessary changes to bring it back on track.
Do let me know if you faced any challenges in preparing and tracking your expenses by using budgets. Also feel free to share other tips for budgeting in comments.