Spending money without a budget is like jumping of an airplane without parachute
– A Sage Once Said
Budgeting means analysing your income and setting standards for your expenditure to allow yourself spend in a wise manner and save money for the long term. When you budget on personal level you allocate a certain percentage of fund to a expense category say groceries, house repair, etc. While in a business a budget defines how much you are allowed to spend on a particular business component to allow expansion and drive profits. Budget helps you better understand your money flow and paves the road to financial strength. Most people find budgeting as an unnecessary work and end up questioning where all their money goes. In this post we are going to discuss about budgeting at personal level.
Analyse & Plan
The most obvious question when you understand why you need a budget is how to get started. And my advice is take a piece of paper and a pen. In order to prepare a budget you have to first understand your money inflows and outflows. Note down all the sources of income on a piece of paper and all your expenses for the month below that. Once you have written everything down start categorizing. Expenses can be essential expenses like rent, grocery, emi, bill payments and non-essential such as buying new clothes, shoes, watches, etc. Once you are done with tagging the outflow of your money it is time to make a better outflow. Decide on what are the expenses that can be reduced. If your goal is to just save some money for the future you can just cut expenses that you think are unnecessary. But, if you are planning to be rich someday you have to cut all the expenses except that are essential.
1/10 Budget Rule
When preparing a budget you must have some set rules that allow you to limit and plan your expenditure. This 1/10 rule is one of my favorites. I came across this rule while scrolling instagram. This rule basically means you are allowed to spend only 1/10th of your money on unnecessary expenses that you do just for fun. Expenses like buying a new car, going out on an expensive date, going on an unplanned trip, partying on weekends. As per this rule if you want to buy a watch that costs 10,000INR you must have 1,00,000INR in your bank account. This way you will end up buying your first car when you already have lacs in your bank account. The rule requires a lot of discipline and is not recommended for most people.
1/3 Investment Rule
A budget is not just limited to cutting expenses but it also involves planning investments. The 1/3 rule suggests you should always aim to invest 1/3rd of your income. Now, investment doesn’t mean putting the money into bank account. In fact, you should not keep your money in bank account except emergency fund. Now, you might ask where to invest money. That is indeed a good question and I will answer that in upcoming content. But, for now short answer is mutual fund. Mutual fund are the best options for common man to invest as they offer good returns with limited risks. Coming back to the investment rule not everyone is able to save 1/3rd of their income for them I would recommend investing as little as they can. Because, once your money starts growing itself the burden on your shoulder is reduced.
Tools
When it comes to budget planning and keeping track of all the expenses the pen and paper method is a bit too much time consuming. Instead I like to use some set of tools. You can use Khatabook to track expenses or any money that you lend to others. You can also add budget in khatabook just create a new customer with the name of expense category say groceries. Now add green amount in the grocery section that is your budget every time you buy grocery add money via red button. Apart from that you can use an excel sheet to track your money flow. In the excel sheet you can mention all the in flows and out flows.
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