Photo: iStock
Photo: iStock

How to create a budget that is not a burden

While budgets are indispensible for a secure financial future, many find it difficult to stay with them. We analyse why and look at ways of creating a sustainable household budget

Is your budget working? You may be doing your best but watch out for signs that tell you that you need to take corrective steps. If you regularly hit the upper threshold for expenses well before the month is done, or you find the limits too constraining, or you are constantly juggling funds from one expense head to another, or you don’t seem to be making much of a headway on the debt and savings goals; then these are signs that your budget needs a relook. Here are some indicators that errors may have crept into your budget, and it needs fixing.

If you regularly find yourself out of funds mid-month, it is an indicator that you may have missed something in the initial stage of setting up your budget. Instead of tracking expenses over a few months and then deciding the limits, you may have tried to guess or approximate the expenses, which may not accurately reflect your actual level of expenses. Another consequence of not tracking the expenses before making a budget is that you are likely to miss the smaller spends, which can all add up to become the deal breaker. If that has happened, you need to go back to the drawing board and start again—this time with a thorough analysis of all the expenses. Reset expense limits to what are more in line with your actual expenses. Another discipline that helps you stay within budget is to log your expenses regularly under each head. This way, you know when you need to take corrective action before things get out of hand. Update your budget every time there is a change in income or expenses, or at least every year, so that it reflects your current levels of income, expenses and the ability to save.

If you find that the savings you expected are not materializing despite living by the budget, you need to check if you have done all you can to cut your expenses. For example, you may consider some expenses such as telephone, internet, cable television, and transportation as fixed costs without exploring whether you can reduce those costs.

Is there a less expensive service provider, can you relook the packages and services? These are some of the ways you can reduce expenses even on communication and entertainment, expenses that you may consider essential. A more fuel-efficient mode of transport, car pooling, using public transport are all ways to find savings in transportation. A less expensive housing option can help in saving rental costs. Look at your expense categories anew to find more savings.

If you find yourself stressed and unable to find the motivation to stick with the financial discipline required to make the budget work, it may be because you have sucked all the fun out of your life. If the weekly movie in the theatres was something that you enjoyed, then give yourself at least one outing a fortnight. Compensate for this expense by cutting on things that you don’t associate with personal relaxation and fun. When you feel deprived of what you enjoy, you become resentful of the exercise that you see as the root cause for it, namely the budget, and you are more likely to give up on it.

Much of the stress about your finances and budget can be reduced if you have a safety net in the form of an emergency fund and a money cushion. The two are not the same. A sudden, unplanned and unbudgeted expenditure in an emergency, or a loss or reduction of income can send your ability to meet expenses off the rails. An emergency fund steps in to help you with this. A money cushion is something for you to fall back on if you overstep the budgeted limits. Since many of the expenses are estimates, there is a chance that the actual expense may be more than what you estimated. In other cases, it may be just poor planning where items of expenses were overlooked or under-budgeted for, or an expense that came up suddenly. A padding of say 10%, helps to soften the impact on your efforts to streamline the budget and build the discipline required to live by it. In the absence of a little wriggle room, there is a high chance that you may abandon the whole budgeting exercise. Keep the cushion in a separate bank account so that you know it is a buffer to be used only when you are stretched, and this money is not part of the budget. From your savings, first build the money cushion and emergency fund. Remember to use these only as intended, and replenish these if they are used.

Not all expenses occur every month. Expenses like taxes, insurance premiums, fees and subscriptions may be annual or half-yearly or some other frequency. If these are not accounted for while preparing the budget, then you will find your budget going off rails when these come up for payment.

One way to make sure that these expenses don’t creep up unexpectedly is to set aside a sum every month in a separate bank account and use it for meeting these expenses as they arise. You can plan ahead for most of these expenses. You just need to take planning to the next level and allocate smaller amounts each month to a sinking fund from which you will meet the expenses as they arise.

For your budget to work, you must make it your own. Going by the recommended ideal allocations usually fails because it does not reflect your needs. Start with a model budget, but customize it to your needs. Get everyone in the household to collaborate and commit to make the budget work.

The purpose of a budget is to give you control of your financial life and get to your savings and debt reduction goals. As long as you see the budget in a positive light and not as a restriction or imposition on your life, you will be motivated to make it work.

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