Budgeting is one of the pillars of personal finance management. In simple words, it’s a well thought out plan of action for the inflow and outflow of money. With a good, realistic budget in place, our money is compelled to work in the most efficient way possible. It enables us to do more than just make ends meet.
So, let’s say you’ve taken that first step – you’ve decided that you’re going to follow a budget. The next question that might pop into your head is, “How do I do this?”
Mastering the art of budgeting isn’t difficult. Follow the steps below and you’re sorted.
The 5 Simple Steps
Step 1: Track your expenses
The first step to formulating a solid budget is to track your expenses. It’s unrealistic to put down random figures against various categories of expenses before truly understanding your spending pattern.
Over the next seven days, choose one of the expenses tracking apps we’ve recommended and start recording every spend you make. “Good Budget” is the newest addition to our app list. You could even use a notebook or an excel sheet instead of an app.
- Jot down every expense – cash, card, online, offline. Every single one.
- Put it under one of the expense categories listed in Step 3.
It’s best to have a maximum of ten categories, especially when we’re just starting out.
Step 2: Record your income
On Day 7, take a look at your pay slip and make a note of your monthly income. If you’re a freelancer, go over your bank statement for the last few months. Note down how much you earn on average each month.
Step 3: Work out model monthly budget
Once you’ve tracked your expenses over a week, you can now extrapolate approximately how much you’d normally spend in a month. Sit with a calculator and write these monthly figures down on a sheet of paper. Tweak these numbers as you see fit and lock in on an ideal budget for all these categories. Let’s call this your model monthly budget.
Here’s a guideline on the percentage (of income) that these ten categories of expenses may be capped at.
- Rent & Utilities – 25% of income
- Food & Ration – 10%
- Transport – 10%
- Shopping & Entertainment – 10%
- Vacations – 10%
- Health & Fitness – 1%
- Repairs & Maintenance – 1%
- Education – 1%
- Gifting – 1%
- Miscellaneous – 1%
Note: These percentages are based on your total monthly income from Step 2. They are guidelines, and may be adjusted to reflect your spending pattern better. You’ll also notice that I’ve only considered 70% here. Step 4 comes into the picture for the remaining 30%.
Step 4: Account for income growth
On Day 8, as you continue to track your expenses, give some thought to the equation, Income – Investment = Expenses. Try setting aside around 30% of your income as savings, which you can then invest. If this figure seems too high at this stage, reduce it, but ensure that it is at least 10% of your income.
10% is the bare minimum. You could up this percentage later on.
As your income rises over the years, increase your savings proportionately. We often tend to overlook this aspect but it’s absolutely essential when you factor in inflation.
This step is the key to making your money work for you.
Step 5: Spend 10 minutes every Sunday
We’re in Week 2 now. Make expense tracking a habit. Jot down every spend as and when you make it.
Then, once a week, say starting on a Sunday maybe, set aside ten minutes to collate your weekly spends in your budget sheet. It only takes ten minutes to do this. Compare the actual numbers with your model monthly budget numbers. Adjust the model numbers where necessary. Be flexible with yourself, especially in the first couple of months. This is something new, something you’re just getting the hang of. Being patient with the results helps.
A decision to start budgeting is great. But a decision that doesn’t translate into action is nothing but a plain and simple intention. Consistency is the key to following a budget. Give yourself two to three months to grow into this habit. Take baby steps.
- Daily tracking of expenses
- Weekly collating of this expense data
- Monthly review of budget figures
Most of us have a rough, mental outline of how much we spend and on what. But implementing these steps, week after week over just a few months, will without a doubt, form the backbone of your financial life.
Following a budget will enable you to always have enough and more than you need, it will steer you towards being debt-free and will ensure that your focus from the ultimate goal of financial independence never wavers. Not everyone practices good money management habits, but the people that do, are unequivocally happier, stress-free and financially healthy, lifelong. Absolutely 100% of the time.
