Budgeting is one of the most important financial habits you can adopt. But if you have never lived on a budget or have not taken part in all the advantages that budgeting has to offer, it is easy to question why it is such a paramount aspect of personal finance. Hence, now the question arises that why is budgeting important?
In brief, budgeting is necessary because it permits you to control your spending, keep track of your expenses, and save more funds. Further, budgeting can also help you in making better financial decisions, preparing for any kind of emergency, getting out of debts, and staying focused on your long-term financial goals.
In simple words, living on a budget is an essential component of accurate financial management.
What is a budget?
To explain what is a budget in simple words let us understand the basic definition of the word - A budget estimates the revenue as well as the expenses over a specified future time that governments, businesses, and individuals utilize. A budget is a financial plan for a defined period, usually a year, known to enhance the success of any financial undertaking greatly.
It simply means creating an understanding of your savings and expenses for a defined period of time that will assist you in creating a better financial standing for yourself and your family.
Why budgeting is important
The importance of budgeting is directly proportional to saving more funds for your future needs. While saving is important, creating a budget of your savings, expenses, and more should also be of utmost priority to create a balance in your financial plan.
Budgeting creates a sense of discipline when we are making a financial plan for ourselves. Having a set amount of money to save, spend and use on daily expenditure liberates you financially and creates a better monetary standing for you. The times of emergency and need come unannounced hence, creating a budgeting and adhering to the same will help you in saving funds that can be used in times of need.
How to create a budget
Creating a budget does not have to be a very stern and hectic process. It can just be simply jotting down your needs, wants, expenses and savings for a month or a year, as it suits your plan. However, there are some of the below mentioned factors that you can keep in mind while you are creating a budget for yourself. These factors will help you in analyzing your spending and expenses and will help you stick to your budget.
Here are some of the key pointers to keep in mind while you are creating a budget -
Analyze: Earnings & spending
To make a good budget, you must first know how much you earn and spend the money. Start by dividing your budget into three parts: Income, Expenses, and Savings.
Income: List down all your sources of income and net income that you receive hand per month (after all the necessary deductions)
Expenses: You must track your expenses for at least two to three months across some of the broad categories as mentioned below:
- Food and groceries
- Fashion and clothes
- Daily utilities
- Communication services
- Transportation services
- Education of children
- Basic entertainment
- Travel across places
- Charity if any
- Medical needs
- Debt repayment
Allocate funds
Now that you know where you are spending your funds, it’s time to look closely into your expenses without compromising the way you live.
Financial goals
Define your goals and work backward from there. For instance, you want to save Rs 30 lakh for your child’s education in about ten years from the present time. You can use online calculators to understand how extensively you need to save every month from attaining that amount. Now, take a good look at your savings column. If it is not counting up, you need to cut back on your expenditures that fall under unnecessary expenses.
It is sure that you cannot cut back on necessary expenses like food and groceries, debt repayment, or medical or education. But do you need that expensive data plan, or you can find an alternative? Can you eat out five times a month instead of nine? With some planning, you can enormously reduce your entertainment, utilities, communication, and transport costs.
Track your expenses
You have created a budget plan and distributed funds to the distinct categories; now you should track and review your expenses every month.
Ask these questions to yourself and keep a check on them
- Has your allocation been practical?
- Are you sticking to the planned budget without any kind of significant lifestyle compromises?
- Are you missing back on essential things in life and spending more on luxuries?
- Are there expenses that you had not kept in the account?
A budget is not a holy document, and you need to keep examining and adjusting it according to your evolving requirements.
Stick to your budget
The most important part after you know all of the above is to be disciplined and to stick to the budget and plan you have created for yourself. Creating a budget and having that in hand is a great idea but what makes it extraordinary is to adhere to it and be strict with what you have created. Sticking and religiously following your budget is one of the only ways that will be fruitful for you in the future.
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This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empanelled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees, and contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.
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