How to manage your money: A step-by-step guide
Budgeting is the base for financial planning. Irrespective of its strong construction, a building becomes weak if the foundation is weak. Success of the financial plan depends on the success of the budgeting. You may belong to the society of hand-to-mouth existence or you may belong to the affluent society. But budgeting is very crucial for your financial strength irrespective of your background.
Thiruvalluvar, a much-celebrated Tamil poet emphasises budgeting through his following lines:
Incomings may be scant; but yet, no failure there,
If in expenditure you rightly learn to spare. (Kural: 478)
Who prosperous lives and of enjoyment knows no bound,
His seeming wealth, departing, nowhere shall be found. (Kural: 479)
Most of us hesitate to make a budget because we think it is about cutting all the fun in life. Budgeting is not about cutting all the fun; it is about conscious allocation of funds. Once we start spending consciously, our mind will find out a whole new way of having fun within the budget.
Budgeting: A bird's eye view
A small leak can sink a great ship. A business will become weak, if its income and expenses are not in control. Similarly a family will be financially feeble, if its income and expenses are not in control. As most of us think, budgeting is not a tedious job. If one could break the whole budgeting process into a few small steps then budgeting becomes a very simple job.
First one should list down his income from various sources. Then he should track his expenses. After that, deduct the total expenses from your total income. If the result is a positive number, congratulations, you are spending lesser than what you are earning. If the result is a negative number, don't worry. The idea of budgeting is to identify the loophole in your income and expenses pattern. Just doing a few small adjustments to your spending habits could help you improve your financial situation.
If you have not done budgeting so far, try it now. Once you complete the budgeting, you will feel more committed and more confident. It will give you lots of positive energy.
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K Ramalingam, an MBA (Finance) and certified financial planner, is founder & director of Holistic Investment Planners (P) Ltd. He can be reached at firstname.lastname@example.org
Photographs: Rediff Archives
Making budget: A step-by-step guide
There is a saying, 'God is in the details'. Detail every bit of your financials while creating a budget.
1) Collect every financial statement
It could be your ITR, Form 16A, Form 16, bank statement, credit card statement, demat account statement, other investment receipts, utility bills etc. The idea is to make out the monthly average of income and expenses. Therefore the more details you can get, the more relevant and accurate will the budget be.
2) List down all your income sources
It is very easy for us to list down the income from employment or self-employment. Normally we will lose track of income from investments, rental income and other miscellaneous income. Also check is there any annual income. Don't forget to record the incomes received by way of cash equivalents like meal voucher and credit card reward points.
3) Sorting out the expenses
We can easily list down the major expenses. But listing out the miscellaneous and petty expenses would be difficult. This is where the collected financial statements would help. Don't forget the annual expenses like car insurance and property tax. Once you have recorded all the expenses then split them into fixed expenses and variable expenses. This classification will provide much more clarity.
4) Savings or over-spending
Now you have your total income as well as total expenses. Deduct the total expenses from the total income. You will know whether you are saving some money or doing over spending. If you are saving some money channelise that money into the priority areas such as clearing your credit card outstanding or any other loan to become debt free or retirement savings or children's future plan. If you are on over spending, then you need to make some adjustments to expenses.
5) Slightly change your spending pattern
On your expenses list, pay close attention to the variable expenses. This is where you can cut short a few expenses.
Every month we need to keep aside appropriate amount for the proportionate annual expenses.
You can find out the reasons for over spending. Most of the cases it would be emotional buying or unplanned shopping. Once you have pointed out the reasons for overspending, then find out the steps or precautions to be taken to rectify the same.
6) Monthly evaluation of budget
Every month set aside an hour to compare the actual expenses with the budgeted expenses. If there is a negative deviation, find out the measures to control them.
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Behavioural aspects of budgeting
Budgeting is not a one-time activity. It is a continuous process. Normally we start budgeting with a genuine motive. But after a few months it may get off-tracked like dieting or exercising. Therefore one needs to understand the behavioural aspects of budgeting.
1) Optimistic approach
Never focus on the negative aspects. Focus on the benefits of successful budgeting. What will you accomplish by creating a budget? It could be becoming debt free, some money for vacation, planning for retirement or children's future.
2) Keep your enthusiasm alive
Budgeting may over a period of time become routine and hence boring. Set a few short-term goals like trying to repay the personal loan in 18 months instead of 36 months. If you achieve it reward yourself. Recognition could be a good motivating factor. Inform all your family members, friends and well wishers about your progress on budgeting.
3) Realistic expectation
One needs to keep realistic expectation on the outcome of the budget. Over expectation may de-motivate you. Budgeting is not magic. It is an art like singing and dancing. You will be able to progress it only over a period of time with constant practice.
Now you have all the information needed to create your budget. So go ahead and create one for you.