Most of us dream of becoming wealthy and living a comfortable life but are often unsure of how and where to start. One of the common problems that people state is that they are not able to save enough to be able to invest. However, they do not realize that they are missing a very important point about investment. All we require is a little bit of discipline and a systematic investment plan and then no income is small enough to not invest.
Investing with a formal plan helps an individual to accumulate wealth to meet their financial goals and achieve financial independence. This journey towards financial freedom starts with budgeting.
What is Budgeting?
A budget lays down where and how to spend your hard-earned money. A budget tracks money inflow against money outflow. It is a tracking tool that helps to avoid excess expenditure and promotes saving to meet financial goals. It can help to balance expenses with income. Individuals should track their expenses and determine whether they are saving enough to meet their financial goals. Each time we earn money, track it as income, and each time we spend money track it as an expense. It allows us to determine in advance whether we will have enough money to do things we need to do or would like to do. Even after we get the budget established, we will need to revisit it periodically with major life changes.
Why Is Budgeting Important?
Budgets are universal and prepared by governments, organizations, and individuals. Budgets help save, track expenses and help reduce them in the future.
Income is limited and a budget helps reduce the burden of bills on the paycheck while promoting savings.
Budgeting can be short-term or long-term and every surplus budget helps contribute toward a long-term goal.
One can opt for a 50-30-20 budget rule where they spend 50% of income on needs, 30% on luxuries, and save the remaining 20%.
Tips to Help with Budgeting
Create a spending plan and start saving
One must keep track of their expenses and study their spending patterns. Spendable money does not mean the monthly salary, it includes preparing for emergencies. Saving a part of the income is the ultimate goal for budgeting and one should ensure that they are saving a certain sum every month.
All expenses should be tracked including one-time expenses like property taxes and should be considered when preparing a budget.
Differentiating between needs and wants and cutting down on wants
Needs comprise those expenses which are required to survive eg. rent, food, transportation, and medical expenses. These costs are unavoidable and cannot be curtailed beyond a certain level.
Wants are the things we spend money on to make our lives more comfortable, eating out twice a week is a want while money spent on groceries is a need. We should try and curtail our wants as much as possible to avoid living from one paycheck to another.
Do not overspend
We often indulge in luxuries and end up overshooting our budgets. To ensure that this does not happen, we need to stop overspending and look for cheaper alternatives. Like taking a bus instead of a cab to work, carrying lunch to work, and not spending unnecessarily in cafeterias. These little efforts help make a big difference at the end of the month.
Keep your credit card away
A credit card allows people to spend money that they have not yet earned. This creates an illusion for the cardholder and allows them to spend more than they should and come at a cost, they often carry hidden charges and have very high-interest rates in case of untimely repayment. It is best to avoid swiping the card unless necessary and regularly check statements and pay off any outstanding bills as soon as possible.
Hold yourself accountable and be realistic
Without accountability, it is futile to maintain a budget. In case we overspend we need to reduce expenditure for the upcoming days to stay on track.
When budgeting, it is best to start with an actionable approach, it is not possible to cut down expenses immediately. Budgeting is a process that requires a lifestyle change and needs to be done systematically to make it sustainable. Opting for a flexible budget is important as it helps transition better to new phases of life and makes the process easier.
It is difficult to get on a budget but technology has made it easy, apps suggest alternatives, and keep track of the money regularly making the process less tedious. Budgeting requires commitment but the tradeoff is worth it as it helps build wealth and allows us to plan our future.
Consult a Financial Advisor
Budgeting is an important aspect of an individual’s financial planning process. A good budgeting exercise helps in better understanding the quantum of savings that an individual can generate which will help in forecasting the future income stream and whether an individual is on track to meet his future financial needs. It is therefore important to consult a SEBI registered Investment Advisor who can assist you in preparing a good financial budget in an unbiased manner. An advisor will not only help you prepare a budget but also help you in setting up an asset allocation strategy based on your goals and risk appetite. A financial advisor will also help you monitor your budgets regularly to ensure that you are on track to meet your future goals.
Disclaimer: This write up is solely for educational purposes.
Tavaga is everything you need to start saving for your goals, stay on track, and achieve them in time