IndiaLends Advisory

By IndiaLends Advisory

Jan 07, 2019

How To Budget Your Money | Step-by-Step Guide

Although budgeting is known to be one of the popular and easy ways to save money, it still seems to be a daunting task. This is primarily because it is very difficult to stick to something which you are not used to. And since budgeting requires you to restrict yourself from impulsive purchases, you often think how to budget your money in a way that it doesn’t fail.

However, the secret answer to budgeting is to create a budget that is customized for you. Whether you want to save more or limit your expenses, a budget that works for you can do wonders for your financial well-being.

In here, we tell you a step-by-step guide that can help you budget your money. These steps are easy, convenient and can be customized to your lifestyle.

But before that, let’s go through the basics and understand the meaning of a personal budget:


What is a budget – Budgeting Definition

A budget is nothing but a planned list of your expenses and income. Since you generally know the income you receive every month, a budget mainly helps to plan your expenses. Now, you might feel a budget limits you from enjoyment and fun, but it’s exactly the opposite!

A budget brings a system in your financial life and helps you move a step closer to what you truly want. It helps you understand the difference between a need and want. Moreover, a budget can make you understand the worth of money and help you achieve financial freedom easily.

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Why make a budget – Importance of Budget

Now that we know what a budget actually means, here are a few reasons that can arouse you to budget the right way:

→ With a budget, you will have a clear vision of your financial life. Be it expenses, savings or income, you know where and how much you are spending.

→ It is the best way to save money as you are able to find your money leaks.

→ A budget helps you to not go beyond your means.

→ It gives you the power to control your financial life.


Types of Budget

As we mentioned above that a budget works for you if it aligns with your thoughts, here are the most common types of budget:

→ The Zero-Based Budget

→ The 50/30/20 Budget  

→ The Cash Only Budget

→ The “No Budget” Budget

→ The Hybrid Budget

 

♦ The Zero-Based Budget

Under the zero-based budget, you are supposed to balance out your expenses and income. Basically, give a job to every dollar. This basically means you need to exactly match what is coming in vs. what is going out.

Income – Savings – Expenses = Zero

Just like a balance sheet, your expenses, and income at the end of the month should be equal. This is the formula for the zero-based budget.

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♦ The 50/30/20 Budget

In the 50/30/20 budget, you must allocate your income into 50:30:20 ratio. In this, 50 percent goes to your expenses or necessities such as housing or utility bills, 30 percent goes to your desires or wants such as shopping, dining, and others and the remaining 20 percent goes to your savings.

♦ The Cash Only Budget

As the name suggests, the cash only budget is where you use only cash and there is no use for plastic! In this type of budget, you allocate a certain amount to each category and withdraw money accordingly. Thereafter, you put the money in different envelopes and use accordingly.

However, the drawback in this type of budget is that you don’t get a statement of your expenses and will have to remember all your expenses.

♦ The “No Budget” Budget

Well, there is such kind of a budget! Under this budget, you don’t have to worry about limiting your expenses but only worry about your bank balance at the end of every month. The “No Budget” Budget lets you freely spend your income by only keeping a check on your bank balance that you keep by the end of the month. However, this requires you to automate your savings and if possible, your bills too.

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♦ The Hybrid Budget

This is essentially how it sounds. The hybrid budget is a mix of all types of budget and makes a budget of your own. For this, you would require ample research on the different types of budget available and create a budget that works for you.

All you need to do is understand your need for budget – is it to increase your savings or find out your money leaks, or whatever your reason is. Accordingly, you can take points from different budgets and build your own budget.

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How to budget your money | Steps to Budget

Whatever you decide from the types of budget, you would require the steps to budget –

 

Step- 1: Write everything on a spreadsheet or paper

Budgeting does not involve guesswork. Since you cannot remember, it is important to write everything down. This will enable you to review your expenses by the end of the month accurately. In the process of writing everything, do not round off the amount. For instance, if you spent INR 450 for groceries, do not round it off to INR 500 for easy calculations.

 

Step -2: Determine your income

If you are a salaried professional, you might know what you earn every month by simply checking your income. However, if you have any extra income coming in, determine your final income after tax.

 

Step-3: Keep yourself as a priority

Right after you determine your income, pay yourself first in the form of savings. Savings are the most important expense as it lays your path to financial freedom. As the old saying of Warren Buffett goes, don’t save after spending but spend after saving.

 

Step-4: Determine your expenses

Divide your expenses into two categories – fixed and variable. All the expenses that are fixed such as your rent, internet, and EMIs will come under the fixed category whereas the expenses that can be variables such as utility and grocery bills will fall under the variable category. The sum of both will be your expenses for a month.

 

Step-5: Review your calculations

If the total of your expenses is less than your income, then it is a good start. This means you have more money to allocate to your savings. However, if it is the opposite, then you need to make changes to your lifestyle.

 

Step-6: Do it on a monthly basis

It is important to review your calculations on a monthly basis to see if you are staying on track. Moreover, this will also determine whether you have extra money to allocate to your retirement planning or other forms of savings.


Budget Tips

While you budget your money, the following budget tips can help you:

Automating your savings will help you set aside the money for your future goals. If you don’t automate your savings, you might end up not saving anything at all by the end of the month. If possible, automate your expenses too so that you are only left with money that is for leisure.

 

Humans forget. It is not your fault and you’re not the only person. This is why you must write all your expenses at the end of the day and calculate the expenses by the end of the month.

 

Everyone loves appreciation. The same goes for yourself. Treating yourself when achieving a goal will motivate you to lead an organized life.

 

Don’t set unrealistic expectations. If you are earning INR 40,000 every month and have fixed expenses of INR 20,000, it is not realistic to set a goal of saving INR 15,000 every month. Always set goals that you can achieve.

 

So, there you go! Here is everything you require to make a successful budget that works for you. Don’t forget if you wish to take control of your financial life, you need to first learn to control your money.

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