How to make personal budgets a success
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Most of us have tried to live by a budget at some point or the other. But we get tired of living from one salary date to the next, and wonder why money is tight despite having a good income. We turn to the budget as a cure for our money ills. And rightly so because it’s a powerful tool as it helps direct our money, and balance spending and saving.
Budgeting is a simple exercise. We need to assess our income, list our expenses and saving requirements and then make sure we cut back on our expenses to manage it within the available income.
“One should get in the habit of writing down expenses. Make a note of them on your computer, say, in a simple Excel sheet. When you are outside, keep a note pad handy and write down your expenses. Writing down your inflows and outflows lets you take control of your money. You will realize where your money is going, which will make you money conscious,” said Steven Fernandez, a Mumbai-based financial planner. “But people complain that they do not have time and can’t maintain a budget. They can use mobile phone apps instead,” he added.
Simple is it not? Then why is it that most people don’t seem to be able to stick to their budget? The answer lies in the details. How well we tailor the budget to our particular needs and situation will make the difference between success and failure. Given its importance, we need to fail-proof our budget, and these are a few ways to do it.
Set goals and targets
Just like fitness or losing weight is often the goal when you sign up at a gym, you need to have goals for your budgeting exercise too. Your goal may be to save more, reduce debt, accumulate money for a holiday, or any such money-related aim.
To make the exercise goal-focused, it is good to set targets. For example, increase savings by 15% over last year, save Rs.50,000 in the next one year for downpayment of a car, reduce credit card debt to zero, are all targets with a number attached, which makes it easier to focus.
You may not be able to achieve all your goals at the same time because of the limits set by your level of income and expenses. To be able to set these targets it is, therefore, important to prioritize. “A budget facilitates in organizing, planning, and prioritizing the allocation of one’s finances and aids in creating a strategy or a roadmap. Budgeting also helps one to spend responsibly, and assists in achieving fiscal prudence,” said Shifali Satsangee, founder and chief executive officer, Funds Ve’daa, an Agra-based financial planning firm.
Follow the money
Most of us keep mental accounts and broadly know where we spend. “But just mental notes don’t give the exact picture—you could be wrong about what you spent,” said Arvind Rao, chief planner, Dreamz Infinite Financial Planner. For example, you may think your monthly grocery expense is Rs.15,000 at the supermarket. But you may have overlooked the Rs.500 you spend each week on small purchases at the neighbourhood store.
As a prelude to preparing the budget, spend a month or two tracking how you spend. Note each expense, however small, so that you know where your money is going. Once you know where you spend, you can prioritize expenses. There are two advantages of knowing how you spend: you can budget an adequate amount for the expense and you can look at ways to cut back or economize where you seem to be spending too much.
Categorize to manage
Have a category for mandatory obligations such as loan repayments, rent, insurance and other fixed expenses that have to be taken care of first. If this takes away a big chunk of your income, you know that maybe debt reduction is a priority goal. The residual income is what’s available to meet living and discretionary expenses. Till you are able to reduce your debt and free your income, much of the cutbacks will be here.
Don’t make the categories or sub-categories too narrow and restrictive. Anytime you exceed a limit you feel discouraged and are likely to give up the whole exercise. Instead, have a broad category for, say, recreation, and then give yourself the choice of how you want to spend between movies, eating out and other outings. “When you draw up your budget, divide it into three categories: spending, saving and splurging. Take into account all fund flows; not just cash flows but also credit card expenditure,” said Rao.
Be realistic rather than optimistic when you assign amounts to different categories. You would like to think that you can manage with little but it may not really be possible. For essential categories that you don’t know the exact amount for, such as for food or medical expenses, always budget more. Exercise discipline and cut back in the discretionary expenses. But don’t cut out all the fun expenses. Else you will feel a sense of deprivation and look for the first excuse to get out of it.
Save and then spend
Pay yourself first for your savings goals along with other mandatory expenses. Again, it is important to be realistic about what you can save. Setting yourself a very high target right from the beginning may be doomed to fail because it may require severe cuts in spending, which may not be easy to sustain.
“Earlier, the equation used was: income-spending = savings. Now, with all the distractions (flash sales and the like), it becomes more difficult to resist spending. So the equation has changed to: income-savings = spending. Work on keeping up with your budget, around this equation,” said Rao.
Put your saving on auto-pilot, where the amount gets invested or used to pay off debt as soon as it is available in your account. This way you don’t get a chance to prevaricate or change your mind between saving and spending.
Fund for emergencies
The most important thing you can do to make your budget a success is to have an emergency fund to dip into for unexpected expenses. If you don’t have this safety net, you will be forced to deviate from your budget. But use the emergency fund with discipline for essential expenses only. And if you dip into it, replenish it as soon as possible.
“Ideally, an emergency fund should be enough to cover your major expenses for 6-9 months. It should take into account housing expenses, food, healthcare, debt repayment, transportation and personal care expenses,” said Satsangee.
Use cash over credit cards, as far as possible, for making payments for expenses. When you see your cash depleting, it acts as a brake on your spending. Sign up for intimation by SMS or other means, every time there is a debit to your bank account or you swipe the credit card.
Create a budget that works for you in terms of priorities and limits. Make sure it reflects your situation today, and update it whenever there is a significant change in your income or expenses. And be ready for slip-ups. Don’t let it dishearten you, but recover and get back on track. Set yourself small budget-related targets and reward yourself when you achieve them. Over time being in control of your money, and living within your budget becomes a habit.