All good financial planning begins with effective budgeting. Whether you are trying to pay your bills, control your expenses, save for a dream home; establishing a monthly budget is the stepping stone to achieving your financial goals.
Usually people associate budgeting with restrictions. They imagine themselves pinching pennies, leading a conservative lifestyle. But a budget doesn’t have to be restrictive to be effective. There are steps you can take to create an efficient budget while maintaining a healthy lifestyle.
Here we outline a simple 5-step guideline to achieve the same:
Step 1> List all your expenses and sources of income.
Start by listing all of your monthly household expenses. These include your utility bills, errands, EMI payments, gym fees, medical care, shopping, and more. Analyze the past six months, this will highlight any expenses you might have missed. Cross them with your credit card bills or your bank statement.
Therefore, list all your sources of income. Besides your monthly salary, look for dividends or interest that you receive on a regular basis.
You need to understand the flow of your money. Where it comes from and how you spend it. This exercise can help reduce some of the overspending habits that you may not know about. For example; a recent survey found that most people end up spending too much money on entertainment and dining. Reducing these expenses can leave you with more money. Money to pay off loans, increase your savings, etc.
Step 2> Assess your financial future
Budgeting is the cornerstone of financial planning. It is an effective tool for achieving your financial goals. But if you’re new to investing, chances are your financial goals aren’t clear, leaving you with no idea how much you need to save.
Start by defining what is important to you and use that information to define your financial goals.
A short-term goal may be to pay off debt or buy a new device.
A mid-term goal may be to take a luxury vacation or save for a new car.
A long-term goal includes retirement plans, paying off a mortgage, or saving for your child’s education.
Identifying financial goals defines all other important aspects of the investment. In addition, it establishes your savings goals, which must be factored into your monthly budget. You may not be saving enough for your child’s education or investing enough for your retirement. The key is knowing where you want to be, so you can get there faster, by making amends today.
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Step3> Create a realistic spending plan
Once you’ve set your goals and assessed your expenses and income, the next step is to create a budget; a spending plan. The one that will help you save adequately each month to reach those goals.
If you save enough for your goals, that’s fantastic! Continue with your existing plan and start investing early. But if your expenses exceed your income, you have two options; look for ways to make more money or spend less.
Generally, it is easier to reduce your expenses. So go through your budget and identify areas where you can make cuts. Shop and dine out less. Use coupons and take advantage of loyalty programs. Save on electricity bills by using energy savers. Demotivate yourself from spending. Using cash instead of credit cards is a big disincentive for spending.
Save money for fun activities and plan ahead for spending on special occasions. It will ensure that you continue to follow it for the long term.
Step4> Don’t be afraid to make adjustments
Maybe you’ve quit your job, you’re getting married, have a kid on the way. Whatever the reason, your long term goals are bound to change over time, forcing you to adjust your budget.
Plus, there’s a good chance the first draft of your budget didn’t work out. Maybe you missed a big expense or forgot to create a fun fund (money set aside for fun activities), forcing you to change your budget.
Knowing that your budget will change shouldn’t put you off creating one. Knowing that your monthly budget can change doesn’t mean setting one is pointless.
A solid budget not only gives you direction, it is also a great starting point for successful financial planning.
Step 5> Make it a habit
Whatever budget you develop, it won’t help you if you don’t follow it. The key is to make it a habit.
According to a 2009 study published in the European Journal of Social Psychology, it takes 18 to 254 days for a person to develop a new habit. The study also concluded that it takes an average of 66 days for a new behavior to become automatic.
So try to make it a habit. Also, hold yourself accountable. Don’t just jump in, take small steps towards big changes. Save money for special occasions and fun activities. And maintain an adequate emergency fund (6-9 months of household expenses set aside for unforeseen events). These steps will take away any monotony from budgeting, making sure you stick to it.
A budget only works if you are honest about both; your income and expenses. You need to be prepared to work with detailed and accurate information about your income and spending habits and make amends. Keep in mind that small changes in your lifestyle today, while difficult, can ensure a much better and financially secure future.