After we have made some good financial resolutions, it is now time to take a step forward and work towards making a ‘Budget’. Making a budget is basically estimating how much income is coming into our pockets and how different expenses are eating our hard earned money. As they say, you cannot get into shape without controlling your diet, you cannot accumulate savings without watching your expenses and budgeting precisely aims at that.
Here is simple steps to prepare your budget that will help you get financially fit:
- Decide to Prepare a Budget – The most important step to get financially fit is to sticking to a budget. Without knowing your expenses, you cannot really think to take control over the same. Since after reading the title of the post and still continuing with the post, Congratulations to you for continuing towards budget planning.
- Know How much You Earn – One must start with listing down the sources of his income and then compiling the amount that accrues as income from each source every month. For a salaried person, this is an easy exercise since fixed salary gets credited to the bank account on monthly basis, but for a professional or business person, the same may be gathered through an analysis of the bank statements.
- Know your spends – An individual can usually categorise his spends into mandatory spends and discretionary spends. Mandatory spends are those expenses which you have to pay each month without curtailing much of them e.g. house rent, phone bill, insurance expenses, interest on loans etc. Discretionary spends can basically be defined as spends at the discretion of the individual and these can normally be controlled by exercising certain financial wisdom.
- Compiling Expenses under Different Categories – Now that you have listed down the sources of money and kinds of expenses, the next step is to compile the expenses under various heads, especially discretionary spends to check the sources of leakages due to excessive spending. When you prepare such list, you will normally notice that you purchased an outfit last month which you have not yet worn, or you have been going much more frequently to movie halls than what your pocket allows.
Budgeting aims at setting a monthly ceiling on each type of expenses. It is just akin to asking yourself if you can go to a movie just a single time in a month or making clothing purchases only after you have saved 20% of the incomes. Set a cap on your discretionary spends and see if you’ve been able to balance your budget.
- Plan to Save in the Budget itself – If you intend to have save some amount monthly, which is indeed desirable and ideally should be 20% of the earnings, consider including it as your expenses. It is much easier to save if you’ve planned for it in the budget itself.
- Sticking to the Budget – The implementation of the budgetary plan is as important as the intent to prepare the budget. So, make sure that once you make a budget, you better stick to it or you may end up derailing your financial train off its track.
Well, my finances seem on the right track. What about you?
Check out the A2Z of Personal Finance here.