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  • Writer's pictureSahastha

Plan to create an effective budget

Updated: Oct 4, 2023

One of the first pieces of financial advice that most people receive is that they need a budget. While the word “budget” is often associated with restricted spending, a budget does not have to be restricted to be effective. A personal budget is a summary that compares and tracks your income and expenses for a defined period. A budget will show you how much money you expect to bring in and then compare that to your required expenses. Instead of viewing a budget as a negative, you can view it as a tool for achieving your financial goals.

Is a budget really that important?

When I think about the last vacation I took. I planned things about before I left. First, I decided where I would go. Then, I decided how I would get there (drive, fly, etc.). After that, I determined where I would sleep and even the different activities I would do when I arrived.

Now, imagine that same trip, but without planning.  It would never work, would it? Well, it could, but it would probably cause me a lot of stress.

The same is true when it comes to your budget. If you don’t have a budget, you have no idea where you need to spend your money. You never understand where every single rupee goes.  Without a budget you have no control.

Before you create your first budget, get into the right mindset. Without that, your budget is destined to fail.

Getting started with your budget

If you have never used a budget, you may not know where to start. It is simple to do. You just need to know where to start. There are three key parts to a budget. First, it includes an estimate of how much you’ll earn in a month, your pay from work and other sources of income. From that, you’ll subtract out all of your “fixed” bills the ones you know you’ll have to pay and can either state precisely the amount or approximately how much it will be. You might also include portions of less frequent bills. The money left is your “discretionary” money for things that you can easily adjust.

The purpose of a budget is to figure out how much discretionary money you have and figure out how to use that money in a sensible way that doesn’t make you miserable but also ensures that you don’t run out of money by the end of the month.

There is never a one size fits all method to creating a budget. That is why it is important to find the right type of budget that works for you!

Living on a budget doesn’t mean you can’t have fun or splurges, and fortunately many budgeting methods account for those things. Here are a few to consider:

  1. The envelope system – it is a cash based budgeting system that works well for over spenders. It curbs excess spending on debit and credit cards because you’re forced to withdraw cash and place it into pre-labeled envelopes for your variable expenses (like groceries and clothing) instead of pulling out that plastic.

  2. The 50/20/30 Method – it is for those with more financial flexibility and who can pay all their bills with 50% of their income. You apply 50% of your income to living expenses, 20% toward savings and/or debt reduction, and 30% to personal spending. This way, you can have fun and save at the same time. Because your basic needs can only account for 50% of your income, it’s typically not a good fit for those living paycheck to paycheck.

  3.  The zero based budget – it makes you account for all of your income. You budget for your expenses and bills, and then assign any extra money toward your goals. The strict system is good for people trying to pay off debt as fast as possible. It’s also beneficial for those living to paycheck to paycheck.

  4. Money in Excel – The program is an extension of the popular Microsoft Excel spreadsheet program as an added bonus for Microsoft 365 subscribers. It offers a simple budgeting template, along with the powerful ability to automatically download transaction data from your banks, credit cards and financial institutions. The big benefit of Money in Excel is flexibility, particularly for people who are familiar with spreadsheet use. If you’ve used Excel or other spreadsheet programs many times in the past, this turns Excel into a powerful engine for almost anything you might want to do in terms of budgeting.

How to use your budget

It’s one thing to have a budget. It is another to follow it. Making your budget work is not always easy, but you can do it. Having a workable budget means sticking to it and always analyzing the numbers. Your budget is never one and done. It requires continual maintenance and review to make it work effectively. Recording what you spend throughout the month will keep you from overspending and help you identify unnecessary expenses or problematic spending patterns. Take a few minutes each day to record your expenses, rather than putting it off until the end of the month.

Budgeting becomes super easy once you get in the groove, but you can’t set it and forget it. You should review your budget monthly to monitor your expenses and spending and adjust accordingly. Even if your income increases, try to prioritize saving the extra money. That will help you avoid lifestyle inflation, which happens when your spending increases as your income rises.

The thrill of being debt free or finally having enough money to travel might even inspire you to seek out other financial opportunities or advice. As the saying goes “Budgeting isn’t about limiting yourself, it’s about making the things that excite you possible.”

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