Budgeting is not about micro managing every dime that you spend. (Unless you are like the miserly Uncle Scrooge). It is more about generally being aware of how you spend your money and where it is going every month. Usually, what happens in most households is after the payday, the money is first spent in paying the bills, emis, household expenses, etc. The balance money is not utilised in a planned manner. It is being used on weekends by paying through debit/credit cards when people go out to shop, dine, watch movie. Some of it may go towards investment when a tax saving opportunity comes up. The rest of it keeps on piling and is converted into a fixed deposit after a few months.
Occasionally, when bank statements are reviewed, people cannot recollect where the money has been spent. Keeping a tab on the cash inflow & outflow can be insightful. But what is required is setting a budget in the beginning itself not just to check on spending but also ensuring that the savings are channelised properly.
Here is how you can stick to your budget:
Financial Rule of Thumb:
One of the popular thumb rules in personal finance is the 50-20-30 guideline for budgeting. As per this rule, 50 per cent of the income should be allocated towards fixed costs, 20 per cent should go towards investing for financial goals and the balance 30 per cent can go in discretionary spending like shopping, movies, dining out, etc. Note that this can be used as a benchmark, a good starting point. But depending upon your personal situation, you will have to do the necessary math and assess what is suitable to you. For instance, if you are in your 20s and just started out to work with less financial responsibilities, your ability to save should be higher than 20 per cent. It should easily exceed at least 50 per cent of your income. If you are in your 30s or 40s where you are servicing EMIs & repaying loans, you should try to cut down on your spending and increase the savings proportion to at least 30 per cent. You need to analyse where and how you can cut down on unnecessary spending and increase your savings rate. The rule of thumb can help as a broad guideline to set your budget and avoid random spending.
Envelope system: This is a conventional approach adopted by many in the older generation when there was no plastic money. Earlier, people used to receive the entire salary in cash in an envelope which was then spent judiciously. This is a more tangible method where you majorly spend only cash and when you run out, you stop spending. Let us examine how it works.
First, get a rough idea of your budget. After you pay your utility bills, insurance premium and EMIs online, set aside an amount of cash and use the same only for meeting your household & other personal expenses. Instead of dividing the amount into various small categories, broadly outline the groups as household expenses, personal expenses and savings. The simpler you keep it, the easier it will be for you to manage it. Get an envelope for each category and label their name on the front. Every time you take out cash from any envelope, keep a tab of how much you took out for spending and how much is left.
The envelope system enables you to be disciplined and keep track of money. It eliminates the use of credit/debit cards which otherwise could induce you to overspend, especially under the discretionary group. You can also effectively use this system to identify the group where you spend the most. For e.g., if you think you are spending too much on clothes, set a budget for the same and stash it in a separate envelope. Every time you spend on clothes and reach out for the envelope, it will serve as a good reminder as to how much is left and would inculcate the discipline to stick to your budget.
If you order online, do not use plastic money or net banking. Be mindful of the cash in the envelope and accordingly order. Also, do not transfer money between the envelopes. Once it is empty means it is gone. This will work only if you are being truthful.
How to make the budget work for you?
Experiment for a few months and adopt any budgeting method which is suitable & practical for you. There are many financial apps available as well to keep track of your expenses. However, setting and executing the budget is one thing and achieving the desired results is another. As mentioned earlier, the entire purpose of budgeting is being aware of how you spend your money and how you channelise your savings. The crucial thing is being honest with yourself. If you do not inculcate discipline and deviate from the plan, the entire exercise is meaningless.
To achieve effective results, you can make use of technology. It can make your financial life convenient and help to stay disciplined. You must have often heard of the term Pay yourself first. So, instead of spending first immediately after payday, what you can do is invest first. Technology can help you do that through automation. Link your savings account to your investments and set the latter under auto mode, be it mutual fund investments, fixed deposits, recurring deposits, postal saving scheme, etc. This is one of the best ways to make yourself accountable and make the budget work for you. After this exercise, you will surely be mindful of how you are spending and how much of your savings is converted into investment each month. You will feel in control of your finances and grow confident of your future.