Smart Budgeting Leads to Financial Success

Saturday, June 16, 2018, 6:00 AM | Leave Comment

Preparing and following through on a budget is one of the best ways to manage your finances.

Budgeting helps understand the inflow and outflow of money from the household. It helps analyze and find whether the expenses are less or more than you can afford. It also allows us to direct money towards the right resources and thus helps ensure that bills get paid and money gets saved for the future.

Doing a budget helps us get off the track of living paycheck to paycheck. It helps us sort out our financial priorities and create the correct balancing between saving and spending.

Basic rules of financial planning and budgeting

We have to understand the 3 basic tenets of personal finances so as to be able to make a budget and subsequently achieve financial freedom and success.

These are as follows:

  • Spend less than your earnings: If you make $50,000 a year but end up spending $51,000 every year, then it will only result in a cascade of increased debts a few years down the line. If you spend what you earn, then there will be no savings, no ways to deal with emergencies, or no monetary preparation for a better future. When you spend less than you earn, it creates a more secure financial future capable of dealing with all inevitabilities that life can throw at you.

  • Invest and use your money to make more money: Instead of putting your savings in a low-interest yielding bank account, invest it in proper channels and watch it grow. Investments can mean a lot of things; it can be putting the extra money in an investment account, getting a higher degree to get a better job, or launching a business, etc.

  • Do not forget to plan for the future: Planning for future does not entail just planning for retirement. It also means knowing that you can pay off the purchase of some appliance or device as per the store offer. If you know you may not be able to pay it off, then avoiding that offer is also ‘planning for the future.’ Keep an emergency fund for emergency situations like medical bills, car repairs, etc. Make a retirement plan to have a steady income during old age when you can’t work. The finances should always be maintained beyond the current paycheck cycle.

Basic classification of a budget

A budget helps us handle our expenses and savings in a more efficient manner.

Presented below is a basic classification of any personal budget:

  • 50 to 60 percent of income for fixed expenses: Fixed costs mean items like power, rent, phone bill, groceries, and other expenses remain the more or less the same every month.

  • 5 to 10 percent of income towards savings: Savings are both long and short term savings. Savings can be towards an emergency fund and for different things like purchase of a new appliance, a vacation, etc.

  • 10 percent of income in investments: Budgeting helps us save money and we keep building up on savings with each passing budgeted year, we have to invest a chunk of it so that the saved money grows at a faster pace. Company 401(k) investments taken out of the paycheck can be grouped here.

  • 20 to 35 percent of income in sundry expenses: Life cannot be just about living a budget-constrained life and just saving and investment. It is also about enjoying life. Thus, about 30 percent of your spending can be for ‘financial vices’ like entertainment, drinking, and dining out, etc. Once the other three aspects of a budget are covered, we can all engage in some guilt-free expenditure.

Creating and using a budget

The process of creating a budget is not that difficult. You can make use of different budgeting apps, or create it manually on a spreadsheet, or use any other option that you find easy and feasible.

The budget should suit your lifestyle, i.e., it can be weekly, fortnightly, or monthly. If you need help creating a budget in Manhattan, companies like Valley Spring help clients to manage their spending addiction and find new financial freedom that leads to self-sufficiency and sober living in NYC.

For instance, below are some steps that may help create and budget and use it.

  1. Ensure that the budget goals are realistic: Financial goals can help us make smart money goals. A goal can be ‘Where do I want to be financially at the end of the year?’ This goal cannot be unrealistic else you will just give up midway as the task will seem really difficult. Decide on what are the important things and then commence from there.

  2. Calculate monthly/yearly income and possible expenses: It is helpful when a budget gets calculated on the basis of annual inflow and outflow of money.

    For expenses, calculate all regular payments like mortgage, rent, gas, power, etc. You may check different bills, bank statements, credit card statements, shopping dockets and receipts, etc. to calculate such expenses. In case you are unable to locate all bills, then guess the amount and add it to the overall expense list.

    For income, add all sources of income, including the paycheck from regular work, casual work, dividends, investment earnings, part time jobs, child support payments, government benefits, social security payments, pension, etc.

    Now, create the budget as per the priorities. Include regular basic living expenditure as well as extra costs. Keep spending as you would normally for a few weeks, but note down all the expenses. This can help understand where the unnecessary expenses lie.

  3. Distinguish between wants and needs: After you are aware of all possible expenses, sort them out as per wants and needs. Ask yourself if expense on a certain item is worth it and whether or not it helps or hampers achievement of personal financial goals. Ask yourself if you can live without an expense that you find to be unnecessary. Once your priorities are clear then taking budget decisions become simpler and easier.

  4. Go into budget action mode: Once the budget is prepared, put it into action. Automate savings and investments, i.e., let money specified for saving and investment directly go from your paycheck into the savings account and investment account.

    Stick to the expense budget and avoid any deviation as far as possible. Any extra cash, like a bonus, pay rise, tax refund, etc. should be stashed away in an emergency fund or savings account instead of getting added to the expense budget. Do not change the expense budget for around 6 months.

    After 6 months, review the budget and make changes as needed.

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