The one personal finance move that we all believe will be the answer to all our money problems is to live by a budget. It may be the stress of making ends meet with a limited income, or finding the savings for future goals that makes us turn to a budget.
In theory, budgeting is a pretty simple exercise. You assess the available income, list expenses and saving requirements, and then make sure there is a plan to cut back the expenses, to manage within the available income. There are innumerable aids available—free online and otherwise—that can help you list and track income and expenses, and even provide suggestions on where to cut back. Then why is it that most people don’t seem to be able to stick to their budget? The answer lies in the details. How well you tailor the budget to your particular needs and situation, will make the difference between success and failure. Given its importance, you need to fail-proof your budget and here are a few ways to do it.
Focus on the details
Spend a month or two tracking how you spend your income. It is an important first step in building a workable budget. Note down each expense, however small. Credit card statements and bank account statements are useful sources of information, that can account for the large expenses.
There are two advantages of knowing how you spend: one, you can budget an adequate amount without missing out on expenses that can all add up and derail the budget if overlooked, and two, you can look at ways to cut back or economise where you seem to be spending a lot.
Categorise to manage
Categorising expenses helps allocate the available income according to the priorities, and identify the steps that you need to take to economise. Have a category for mandatory expenses such as loan repayments, rent, insurance and other fixed expenses that have to be met first out of your income. Lowering the expenses in this category is possible only to some extent and can only be done over a period of time. The residual income after meeting this category is what is available to meet living and discretionary expenses. This is where you can exercise maximum economy to cut back on expenses and find the savings.
Be realistic rather than optimistic when you assign amounts to different categories, especially where it is difficult to know the exact amount that would be spent. A too restrictive or tight budget, without any allocation for ‘fun’, will lead to a sense of deprivation and you will look for the first excuse to get out of it.
Prioritise expenses and goals
You may not be able to achieve all your goals at the same time because of the limits set by your level of income and the expenses. To be able to set these targets, it is therefore important for you to sort out your money priorities. You then know what can be your immediate targets and which goals may need to be postponed.
Set targets for goals
Put numbers to goals to be able to plan better and remain focussed. For example, instead of just setting the goal to save more or reduce debt, the goal could be to increase savings by 15% over the previous year and to bring rolling credit on credit cards to zero in 6 months.
Save and then spend
Give your savings goals the same importance as your mandatory expenses. Again, it is important to be realistic about what you can save from your monthly income. Setting yourself a very high target from the beginning may doom your budget because it may require severe spending cuts, which may not be sustainable.
Put your savings on auto-pilot, where the amount gets invested—or is used to pay a debt—as soon as it is available in your account without any intervention from you. This way you don’t get a chance to prevaricate or choose between saving and spending.
Cash is king
Use cash over credit cards as far as possible for making payments. The depleting cash can act as a brake to your spending.
Sign up for intimation by SMS, or other means, every time there is a debit to your bank account or when you swipe the credit card—to act as a reminder to control your spending.
Fund for emergencies
Have an emergency fund into which you can dip if there is an unexpected expense. In the absence of this safety net, you will be forced to deviate from your planned budget anytime there is an unplanned charge. But use the emergency fund with discipline. It is only to be used for meeting essential expenses that you may not have budgeted for; or for expenses that may need more money than you had budgeted for initially. And if you use this fund in any month, make sure that you replenish it as soon as possible.
For a budget to work it should reflect your situation and priorities. Remember to update it whenever there is a significant change in your income or expenses. Don’t let small slip-ups dishearten you, recover and get back on track. Set yourself small budget-related targets and reward yourself when you achieve them. Over time, being in control of your money and living within your budget becomes a habit.
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First Published:
27 Oct 2016, 06:03 AM IST
