One integral component of human life is discipline. The discipline that you follow now can help you rich success in the future and so it is with Finance. finance works on the formula of compounding, the longer you Invest the Higher your returns. A budget helps you bring in this discipline.
What is a Budget?
Let us first understand what Budgeting actually is. A common definition of budgeting is – A predefined plan to manage your Income is known as Budgeting. It is a spending plan. It helps you to pre-plan how much you will spend and what amount will be saved. This plan helps you perform various financial activities without stressing out about Money.
Why should we have a budget?
Here are a few basic reasons that everyone tells you about why you should have a budget.
- 100% control over your money.
- No overspending
- Tracking Financial goals
- Set financial priorities.
- Find a place in your expenses for investment purposes.
- Create an emergency fund.
Ensure you don’t spend extra money. (Overspending)
Every time you go through your Set budget and your financial goals for the month. A budget helps you notice the various ways you are spending money wrongly or unnecessarily. Like buying those extra clothes or pillow covers that you totally didn’t need. You now start thinking twice before spending such money next time. This curbs your wrong spending habits and helps retain the unnecessarily overspent money.
It helps you gather a EMERGENCY fund.
Maintaining an emergency fund is a must for every household or student even for that matter. A critical accident or a broken relationship can leave you financially broke too and that’s when this emergency fund comes in.
Hence it’s an utter necessity that you put in a specific amount into your emergency fund every month. The money in need is due to the BUDGET indeed.
Puts you in control.
Yes having a budget helps you gain control over your money. It simplifies your monthly spending and you can swipe your cards without thinking twice. All this because you already know why are you spending it. Well, it gives you flexibility. Simple.
Normally the prospect of budgeting is rarely known to Indian Households. The credit off course goes to our education system and its lack of teaching personal finance in schools and colleges. But don’t you worry we got your back.
So here is the SECRET I was talking about in the headline.
Now that we know the Little secret about budgeting. Let’s understand how to make a budget.
How to Make a Budget?
Making a budget is not a very hard process. Almost anyone can try and make a budget. there is no such need for a professional to make a budget. You can do it simply by sitting at your home with a calculator in your hand.
How to Make a Budget in 5 easy steps – Step by step Guide
1. Calculate your Net income.
Well, net income accounts for the total income after cutting taxes, loans like your monthly installments(EMI), etc. So the first step would be checking how much amount you would be left with after deducting all your pre-fixed expenses.
This is easy for someone who has Specified salary.
How do I make a budget if I am Self Employed?
In case you are self-employed the best way to calculate your net income would be by considering the income of your lowest earning month. Students get a specific amount of pocket money and hence they would have no issue in guessing the correct Net Amount they have with them also there are no deductions from a student’s pocket money.
2. Create a list of monthly expenses.
The second step in making a budget is creating a list of your expenses. You have to track your spending. Your monthly expenses might include things like :
- Transportation (such a train tickets, and bus fares)
- Household Goods
- Gym Memberships
- Weekend Entertainment
- loans Etc.
3. Label Fixed and Variable Experiences
After you have listed out your monthly expenses. The third step would be to separate this list into two parts Fixed and Variable.
Fixed payments would include Loans, Mortgages, Rent, and Fees. Variable experiences include money spent on Entertainment, Shopping, and other extra expenditures.
It’s important that you make this list because if you are tight on budget or have an emergency you have to cut costs from variable experiences.
4. Goal Setting
The most important part of Budget Making is Setting Goals. Goals should be looking forward to this two things
- Cutting Unnecessary Expenses
- Saving for the Future
Now that you have everything written at hand. Set your monthly goals. Try Cutting Costs on Expenses that can be ignored.
The most important reason why I started this Wealth Management 101 guide with Budgeting is So you have a Minimal goal to save at least 20 % Off your Income. You have to save and compound Money to retire wealthy. An average Middle-class person has always almost no amount left at the end of the month. This has stopped and a special fund should be set up in the form of Investment in Stocks or Mutual Funds. That is the only way you can get rich ( Unless of course, you start your Business or Side hustle ).