Budgeting is a systematic way to manage money: It helps in judicious spending of income and saving it. The income flow is not the same for everyone: Some have a fixed monthly salary, while others have variable income. There are even scenarios, such as pay cuts or job loss, which can affect financial health. Budgeting is a vital aspect of financial planning that lets people deal with these real-life situations and prevent a financial crisis. In this article, we share some budgeting tips for beginners.
What is budgeting
How to map your expenses
A crucial step in your budgeting process is to clearly define different expenses, which are typically classified as fixed and variable. Fixed expenses include house rent, utilities, insurance and loan repayment. Monthly variable expenses, on the other hand, differ in amount. These include groceries, travel and entertainment. Similarly, one can incur irregular or unplanned expenses such as major repairs, big purchases like furniture and out-of-pocket doctor visits.
Now, create a budget tracker and map these expenses.
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Start by calculating your total income. Add up income from all sources: Salary, rental income, etc. Then, compute your net monthly income after deducting taxes. Your spending should never cross this limit. -
Note all fixed expenses and calculate the total value under the fixed expense category. This takes up a fixed portion of the net income. Till here, the calculation is straightforward. -
The tricky part of budgeting comes when assessing the variable and irregular expenses category. To simplify, it is better to club the different expenses together into defined subcategories such as entertainment, travel and miscellaneous. -
Evaluate your variable expenses of the past few months and arrive at an average. At this step, you can reassess and set a realistic budget for each category while allowing some room for the irregular expenses. -
Now, note down occasional expenses that occur once in a while but are significant. These can hurt savings if not allocated in the monthly budget. Estimate an amount that you may spend every quarter or year towards this category and compute the corresponding monthly value.
How to allocate money between bills, savings, buffers and day-to-day spending?
Smart financial planning is when one is clear on how to allocate the right budget for the right expense category. Many financial experts talk about the ‘50-30-20 rule’. That is, 50% of one’s net income should be allocated for needs or fixed costs such as bills, rent, insurance, EMIs and other day-to-day expenses.
The next 30 per cent of income should go towards desires or those variable expenses, such as entertainment and travel. The final 20 per cent of income should be used for savings, such as investments and an emergency fund. This money is often utilised for those occasional expenses that come unannounced.
How to review plans when income changes, expenses spike or fatigue sets in?
Budgeting is a cushion in times when income fluctuates or expenses increase. When irregular expenses start to mount and burnout clouds your mind, a well-planned budget can come to your rescue. To prepare for such situations, it is necessary to build an emergency fund. This can be done by increasing the savings percentage when the inflow is high.
However, if the income decreases or expenses suddenly rise, it is necessary to reassess the monthly budget and make small tweaks to survive the financial stress. At this stage, people generally go into survival mode and cut down on less important expenses. It is time to prioritise the fixed costs and essential expenses. Review the expense categories and put the new budget into essential expenses, expenses that can wait and expenses to be stopped until the situation improves.
FAQs
How detailed does a household budget need to be?
A household budget should be allocated to specific percentages: Needs or fixed expenses (50 per cent), variable expenses (30 per cent) and occasional or irregular expenses (20 per cent).
How should irregular annual costs be built into a monthly plan?
Irregular costs incurred in a year can be significant. Hence, ensuring there is at least 20 per cent provision for these expenses in the monthly budget plan can prevent major financial losses.
What is the simplest way to keep savings from getting spent?
Adopting smart budgeting strategies like the ‘50-3-’20 rule’ and automating, controlling unwanted expenses, choosing investment plans and automating savings can keep savings from getting spent.
How often should the budget be reviewed or reset?
The household budget must be reviewed every month and reset based on the estimated expenses.
