Myth: Budget means deprivation.
Fact: Budget is an efficient way of saving and spending money.
Giving up on your hobbies, staying at home when your peers are partying, saying goodbye long weekend plans, refraining from indulging in comfort food – if this is what you assume budgeting is all about, then you need a reality check.
When someone, especially a spendthrift, hears the word ‘budget,’ they usually freak out, thinking they will have to alter their lifestyle drastically. In reality, personal budgeting is an excellent way to live a debt-free life with an ample sum in your emergency fund and savings account.
All you have to do is spend mindfully, do a little homework every month and aim high to reach pre-determined financial goals. We present some excellent tips below to keep your personal budget on the right track.
What is a Personal Budget and Why it is Important?
A personal budget is an important financial tool that facilitates the achievement of one’s personal financial goals more effectively. Essentially, it means a detailed list of expected income and planned expenditures over a period of time. In a personal finance plan, you’re supposed to allocate your income towards savings and expenses. In your budget, you must include all major expenses food, housing, shopping, insurance, etc. to identify and track your spending habits.
Creating an adequate personal budget and sticking to it can offer immense benefits, including valuable personal and financial growth. Here are some of the most critical benefits of creating a personal budget:
- Long-term benefits
The most significant benefit of creating a personal budget, and sticking to it, is that it can help you fulfil your long-term financial goals. Whether you’re trying to save for a world tour, an expensive car, or your retirement plan, budgeting enables you to stay on track and save regularly for a big-ticket purchase or investment.
- Prevents over-spending
It’s easy to lose track of your savings and expenditure with plastic money. We tend to walk into a store, get lured by the endless aisles of neatly-stacked products, and end up buying unnecessary items.. However, if you create a budget and stick to it, you can prevent reckless spending and focus on buying items that you need, and not want
- Emergency funds
In today’s volatile world, it’s crucial to have a substantial emergency fund ready at all times. If you need extra money for medical emergencies, or if you’re falling back on EMIs, or are between jobs, this emergency fund can come in handy. This fund will help you take care of unanticipated travels, car repairs, home renovation and other emergencies as well.
- Eliminates worry
Financial independence can solve the majority of problems for millennials. If you have your personal budget in place, you can plan how you wish to spend your income and how much you intend to save. With your budget established, you can relax more and worry less about funds, leading to a more enjoyable and comfortable life.
- Enables taking charge
If “where did my money go” is your most common concern, creating a personal budget can change your life for the best. It lets you become the in-charge of your money and expenses. The best part is that you do not have to be a maths wiz to build healthy financial habits and lead a financially disciplined life.
6 Main Reasons why Personal Budgeting Fails
Simply formulating a budget plan on paper won’t magically allocate a bag of money into your bank account. There are various reasons why even the most foolproof budget could fail. Let’s explore some of the main reasons that are responsible for the failure of a personal budget:
- Restrictive and unrealistic goals
It is essential to be realistic and honest when creating your budget. When it comes to cutting down on money, ensure you cut back only on realistic factors. For example, keeping a check on eating out often is more practical than trying to eliminate all fun and entertainment-related activities from your life. The key is to start small, but progress without restricting yourself until you get used to a budgeted lifestyle.
- Lack of goals and planning
It’s imperative to have clear short-term and long-term goals to make your budget a success. Saving money might sound like a plan, but a lack of direction will make you lose motivation in no time. Identify the goals for which you’d like to save, figure out the amount for each goal, and reward yourself once you reach your target. Similarly, you could start planning to achieve a bigger financial goal one day, such as buying your first car or moving into a house of your own.
- Failure to differentiate between wants and needs
Wants and needs might sound the like the exact same thing to many, but both these concepts have a world of difference.. While cutting back on needs is neither ideal, not possible; too many wants can lead to a significant setback in your budget. To give you an example, eating every day is a ‘need’ and cannot be eliminated. But, eating out every day in an expensive restaurant is a ‘want,’ that needs to be consciously managed.
- Disregarding miscellaneous expenses
Considering only your own personal expenses while setting a budget is never a great idea. Consider the costs of your family, as well as other miscellaneous expenses that you might have to pay for, in a particular month before you set your budget. For example, list down all the birthdays and parties that you’re supposed to attend every month and set aside a sum to be spent on gifts. Additionally, do not forget expenses such as insurance premiums, subscription fees, toiletries, car servicing, etc., which might seem low in isolation, but add up together into a substantial amount.
- Not planning ahead for emergencies
A budget remains on track only until an emergency arises. If you do not start working on an emergency fund, sooner or later, it will certainly ruin your budget. So, aim to create an emergency fund as soon as you start saving a part of your income. Create a goal, such as saving an amount equivalent to six months’ salary in your emergency fund or contributing a part of yoru salary each month regularly. In case of emergencies, like, in case of medical emergencies, you can use these savings instead of dipping into your investments or other saving accounts.
- Lack of flexibility
Just like any other system, personal budgeting, too, needs to be updated regularly. Since our income, expenses, lifestyles keep evolving; there is an obvious need to renew the budget accordingly as well. The goals that you started with at the beginning of a year might not make sense now, and will definitely not make sense after another year; thus, they need to be updated regularly Whether you create a plan manually, or use an app to create a budget, ensure you keep updating it after every few months.
7 Practical Ways to Fix Your Personal Budget
An effective personal budget boosts the potential for saving, earning, and spending more. But, most personal budgets are flawed and need some sort of fixing to be successful. To minimise errors and adopt an optimal budget, follow these practical tips to adjust your budget:
- Account for each and every expense
Bills form a vital part of personal budgets, but they are not the only factor that should be considered. Note down each and every expense undertaken every month, whether you have a receipt or not. From entertainment to food and events to repairs, ensure you record each expense. You can use your diary, install an app, or download a simple note-taking app to keep track of your expenses. This is an excellent way to increase your spending awareness and identify your biggest expenses each month.
- Learn to say no
You do not have to beat yourself up for every expense you make, but staying on track with your budget requires some effort and taking some hard decisions. Learn to say no to unnecessary expenses, luxuries and restrict indulging yourself every other day. Being selective with where you choose to spend your money will add value to your personal growth as well and make your more mindful of your purchasing decisions.
- Start saving
Committing to a budget requires long-term involvement and most essentially, a change in the mindset. The prime motive behind creating a budget is to be able to save big in the long term – for emergencies and leisure, both. Create a savings account that you intend to grow and aim at keeping a certain sum aside every month. Avoid using money from this fund unless it is an emergency or if you are falling short of money.
- Shun unnecessary costly habits
Good habits and hobbies are great for your personality, but some of them can impact your budget as well. There are several unnecessary expenses we undertake that have a minimal impact on our life. The monthly subscriptions to premium streaming service can be changed to the cheapest version, membership fee for a luxury salon or a gym can be minimised by learning yoga and exercises. Identify habits and activities that are burning a deep hole in your pocket and try to find alternatives for the same.
- Stop disrupting your budget
Being a free-spirited, rebel-without-a-cause might have made you attractive in college, but it is not really a desirable quality once you start working or start a family. To let your budget work seamlessly, put in conscious efforts to make your budgeting successful. When getting started, don’t just create a budget, actually try and stay committed to it. Create a mindset that promotes better use of your income and funds. The lesser you disrupt your budget; the more likely you are to stick with it.
- Checks and balances
Usually, people don’t realise that they can live comfortably and enjoy their lives, even while living in a budget. Make sure there are enough checks to ensure that your efforts bear results and that you reward yourself on successes. There is no point in depriving yourself of basic needs, so have a system to identify that you’re going overboard with your obsession with budgeting and saving money.
- Keep it flexible
It’s highly unlikely that you will end up spending the same amount of money every single month. Expenses keep rising and falling, and some months’ budget tends to be tighter than that of others. Apart from working on creating a new budget every month, create a budget that’s flexible enough for your dynamic needs. If you think you’ve been lenient this month, cut yourself some slack and vice-e-versa.
Other Crucial Things to Remember while Preparing a Personal Budget
Creating a budget does not mean that you’ll have to lead a boring life with limited means and become a miser. In fact, a budget can help you lead a happier life in the long run, with substantial savings and investments. Apart from the crucial pointers mentioned above, there are a few more factors that you must know while preparing a budget.
- Keep a track of your income – not just your salary or profits, but premium and interest too.
- Know your recurring bills –try to get the best deals in order to save more money on your utility bills.
- Write down your personal financial goals – being consciously aware of your financial goals will help you stay true to your budget for the longest time. If possible, go through them every now and then to see how much progress you’ve made.
- Get an app – in today’s hectic life, there is only one constant throughout the day – our phone. Since your phone stays with you pretty much all day and night long, install an app to help you keep track of your money.
- Use more cash – avoid using cards as much as possible as spending hard cash is much more sobering thought and thus encourages you to save more.
- Remove auto-renewal – if any of your unused apps or services are auto-renewed and deduct money automatically, unsubscribe to them.
Following the tips mentioned above and keeping your budget realistic, achievable and flexible will help you cultivate holistic money management habits. You need to begin by making wise financial decisions and overhaul your lifestyle by eliminating unhealthy spending habits. Create a set budget and keep changing it every month based on your income and expected expenses. Remember to keep adding to your contingency funds as well.
Additionally, do not forget little tricks such as keeping track of your budget in a mobile phone app or lesser use of cards. Like any other habit, personal budgeting will also form with time and effort. However, if you remain consistent, keep an eye on your financial goal, and you can easily make your budget success and lead a happier, fuller and enjoyable life.
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