Keywords: How to create a realistic budget
Learning how to create a realistic budget is one of the most important aspects of personal finance. It is often overlooked in favour of how to plan your investments or save up for the future. While saving and investing are undoubtedly crucial, budget planning should be the first and the most fundamental step in everybody’s journey to financial freedom.
Proper budget planning can make it much easier for you to save and invest more effectively in the future. Before we take a look at how you can create a realistic budget, it is essential to understand why you need a budget in the first place.
There are many reasons why budget planning is important. Whether you are salaried, self-employed, or a homemaker, having a personal budget can be beneficial in many ways. If you have not gotten into budget planning yet, here are 5 reasons you need to start immediately.
Spending more money may lead to you landing in a financial debt trap. A budget gives you a clear idea of how much you earn and how much you can spend, thus preventing you from overspending during the month. This way, you can also ensure that you don’t go broke by the 4th week of every month.
Budget planning also helps you save more money over time. Without a budget guiding you, your spending would be unregulated, leaving you with little to no funds to direct towards your savings and investments. But when you have a plan, you can prioritise savings over spending on discretionary items or experiences.
Emergencies can occur at any time, and if you are not financially prepared for them, you may be forced to tap into your savings or borrow money to meet the costs. Budgeting helps you build an emergency fund to take care of any unexpected medical bills, major home repairs, or vehicle repairs, among other things.
Over the course of your working years, you may have to take care of several financial goals like buying your own home, saving up for your children’s education and wedding, and your own personal and couple goals. Budget planning makes it easier for you to align your savings with these goals to achieve them quickly as per the timeline you have in mind.
Budgeting may seem like a small monthly exercise, but it offers big benefits that can carry over to your retirement too. With a financial plan in place, you can start saving up for life after retirement from an early age rather than putting it off until later. This way, you need not worry about maintaining your standard of living after you’ve retired.
Everybody talks about why budget planning is essential. But once you’ve understood the reasons to create a personal budget, you’ll need more than just the benefits to help you create a plan. Read on if you want to learn the importance of a budget in points & make your first effective budget.
The first step to creating a budget is identifying your total income. This includes not just your primary income (like your salary or your business income), but also the earnings from other sources like your side gig, your deposits and other sources.
Then, track your expenses and list everything you usually spend your income on. You can repeat this exercise for 3 months or so for more comprehensive data points.
It would be best if you sorted your expenses into essential and non-essential (or discretionary) spends. Your home rent, EMIs, fuel costs, internet bill, provisions and groceries are essential costs. The cost of dining out, your premium purchases, and other entertainment expenses are discretionary — since they are easily avoidable.
Once you’ve figured out which expenses you can avoid, the plan is to work on actually reducing these discretionary spends. This way, you’ll have more money at your disposal at the end of the month.
Lastly, the end goal of every budget is to help you save more money over time. So, the funds that you have left after accounting for your essential expenses can be saved up for your future.
Now that you know why budget planning is essential and how to create a realistic budget, you can plan your finances more efficiently. Remember that a budget is merely a benchmark, and as your earnings or financial goals change, you can (and should) adjust your budget accordingly. That way, your personal budget can be optimised to make the most of your income, and you will be able to spend each rupee wisely. Plus, you can always use the Analyser feature or Ask Fi via the Fi Money app to track your expenses & manage them wisely!
To have a realistic budget, you must first list your income and expenses. Then, make a list of your financial goals, and ensure that the savings you make each month are aligned with those goals. If you have any unnecessary expenses weighing down on your savings, make a plan to reduce or eliminate them so you’re left with more funds to invest.
The 50-30-20 rule is a realistic monthly budget plan you can adopt. Here, you need to spend 50% of your income on your essential expenses, 30% on your discretionary costs and 20% on your savings.