'You can't manage what you can't measure' a simple financial principle makes so much sense when one starts to think about it. Whether we like it or not, we are all part of an economic system. Money is such an integral part of our lives that it is almost impossible not to be worried about it and this worry leads to measuring and planning our spends or in simple terms planning our budget. Budget plan can be for a week, month or years to come. All of our wishes and dreams have to somehow come to terms with our financial capabilities. Given the role that money plays in our lives, we must understand how it works and how we can begin to manage it to serve us instead of the other way around. However, as we know, we cannot control what we cannot measure. This brings us to the first step of any financial planning journey, 'Budgeting.' While budgeting might seem like a tedious and unnecessary chore at the outset, it is one of the essential ingredients in the recipe for financial literacy. So let's get right into it.
What is a Budget?
A budget is a plan to record an estimate of any sort of expenses over some time in simple terms. In colloquial terms, the budget has gotten a negative connotation. The first thing that comes to one's mind on hearing the word budget is restricting or not spending money on something people want. However, it is essential to understand that the whole purpose behind a budget is to spend money on things we want to spend it on and not end up wasting it on things we didn't want to. Imagine going to an amusement park where your parents buy you a coupon booklet worth 100 bucks. Now you have plenty of swings to choose from, plenty of food stalls that you love. What would you do? Would you just go to the first stall you find and spend all your coupons? I guess not. You would walk around a bit. Check out different rides. See how much they cost. Try to figure out which ones you want to spend your money on and which ones to avoid. That's budgeting. Yes, it is that simple. And trust me, if you could do it as a kid, you can do it as an adult.
Who needs a Budget?
Another typical misconception that people often have about budgets is that it is for the poor. The myth that budgeting has something to do with how rich you are is false and needs to be broken. Remember that kid from the amusement park. Would the story have been any different if he/she got a thousand bucks? Not really. If you wish to make the most of the money you have, you need a plan. And the budget is nothing but a fancy word for that 'plan.' If you cannot manage a 100 bucks, you cannot maintain a thousand. So, the correct answer to the question 'who needs a budget' is 'Everyone.' Whether you are a school student, college student, employee at a company, a businessman, a housewife regardless of your profession, you need a budget. Whether you live through paychecks, get a salary each month, have a seasonal business, a part-time job, rental income regardless of your income source, you need a budget. It is essential to look at a budget as a plan that empowers you to fulfill your dreams and goal rather than a restrictive tool that makes you frugal with spending.
What can you make a Budget for?
Anything that involves spending money can be budgeted. Whether you are planning to start a startup, designing a family event, launching a new company product, or even building a gaming pc, you can create a budget for it. Any sort of spending involves lots of different components. If you're building a gaming PC, it might make sense to think if you want to spend more on graphics or memory. If you're planning a family event, it might make sense to consider how you want to allocate money between food, decorations, invitations, gifts, etc. Any worthwhile financial decision needs some planning. Want to guess what we call that plan?
How to Make a Budget?
As we understand now, a budget has two main components. One is the amount of money we have to spend, and the other is the list of things we wish to spend it on. Budgeting is nothing but dividing the money we have amongst the list we have to spend it on.
So let's begin with what we have. The first step on our budgeting journey should be to understand our monthly income well. This should be pretty simple for someone whose only source is a tax deducted salary or paycheck. For those of us running a business or having some fluctuating income source, it might make sense to estimate an average yearly income and then divide it by twelve. Once we clearly understand our monthly income. We can get to the next part.
Before we dive into the spending part, let's spend a few moments on saving. While a savings section might not be necessary while budgeting for an event or a gaming PC, it is essential for a daily and detailed budget. It is ideal for saving at least 20% of your monthly income and investing it somewhere. This helps us be prepared for unforeseen and emergency expenses and is essential to any sound financial plan. When you finally wish to plan and budget for that dream vacation, this is the section that you will be grateful to the most.
Now coming to the expenses part, the first step here would be to make a list of everything that you spend your money on. Some examples would be food, rent, insurance, electricity, travel, etc. However, this one is going to be something personal. A quick way to do it could be to think of all the things you spent your money on in the last three months and figure out which ones usually happens every month. You would ideally want to have a miscellaneous/want section for seldom expenses.
Once you have the list, it is time to break down your income (after taking out the savings) into each of these expenses sections. If you are tech-savvy and love working on excel or spreadsheets, you could quickly build charts, tables, and calculators for all of this stuff. But trust me, it is not necessary. You could easily do it with a pen and paper. Or you could even use one of those cool money management tools available online like 'chat with nerd.' The idea is to work with the method you are most comfortable with. As long as you have a plan, you understand what it is, and it is working well for you all is good. It is always better to keep things simple and easier to manage. Many people even like to put their money into separate envelopes to keep a check on themselves. As I said before, whatever works best.
How to stick to a Budget?
I won't lie. This one is super tricky. I want to save for that Pondicherry trip but I also badly want to buy those new ones plus earphones. It happens to the best of us. But let's try to find a solution stepwise. Our expense list was to put 20% of our income into an investment account. Many investment instruments allow us the facility of a monthly scheme where a fixed amount is deducted every month from our account and is invested. This method can help increase the consistency of saving each month. Another trick could be to update your expenses to a finance tracker like a 'chat with nerd' and get an idea of where you have reached after a few days or a week in a particular section let's say food. This practice could help you better understand your spending patterns and make you more conscious of the future decisions you take. It is vital to comprehend budgeting is more like a habit than a one time task. It is something that needs to be done every day. Just like we spend some time on our teeth every morning and night to make sure that they stay healthy and impressive, it is also essential to spend time on budgeting each day to ensure that our finances and everything that comes with it remains healthy and awesome. Once it becomes a part of our day, it is easier than it seems. The upside to this small yet immensely powerful lifestyle change is worth a try. So let us begin right now, visit www.chatwithnerd.com