When it comes to personal finance management, one of the most underrated tools is the monthly budget system. Many households are so very unaware of where exactly they are spending their money, and thus they have no money left at the end of the month. I’ll tell you exactly how to create and get started with a monthly budget.
Pay check to pay check living is keeping one in the loop of never retiring. Money is a tool which makes our lives easier. This is what we are taught from a young age. We are conditioned to get a job and start earning. But we are never taught how to manage our money. One way to manage our money is by using the budgeting system. No matter how much or how little you earn, monthly budget can streamline your personal finance journey.
Creating a monthly budget is not a one-shot thing. You will need to tweak and refine every month. As your life will change throughout the course of years so will your monthly budget. I have been budgeting since my first pay check in Dec 2014. It has been more than 8 years doing so. And I’ve seen my monthly budget get improvised with time.
Budgets do not have to be complicated. There are lots of planners in the market which can be used. Else just a simple excel sheet or a paper works as well. The simpler the better. You should be encouraged to use it everyday. I say every day because in the beginning it is a must to update the budget every day to stay on track.
As you progress and are more in control of your finances, you can check and update the budget tracker periodically. I still prefer to update it at the end of every day, but if I do not have much time I do so every Friday to register my weekday expenses and every Sunday night to register my weekend expenses.
Let me begin by telling you why it is important to create a budget in the first place. It is important because budgeting isn’t a very glamorous activity. You may or may not want to do this basic math every single day. But knowing its benefit and how it can change your financial journey and YOUR LIFE is going to be motivation enough. The benefits to budgeting are many, but I am going to point out the ones that I have tried and tested from my own experience which have yielded great results for me.
Table of Content:
Pros of Budgeting
- You are more in control of your money and life and know exactly how much you need to survive and how much you can let go for splurges without feeling guilty.
- You do not just survive but do very well even if you make less income. Ever since I learned the art of budgeting, I stopped chasing money and high-income jobs. Yes, I would love a big fat pay check, but most of my working life I have made less than the market standard pay and have saved and invested more money than anyone earning double my salary. All this without skipping shopping, entertainment, eating out etc.
- If you are someone who aspires to quit the corporate job and make money out of your passion, it gives you the financial baseline where to begin. You know exactly how much you should be making per month with your passion projects before quitting your corporate job.
- Budgeting teaches you the value of every Rupee. It is very easy to spend on splurges and very difficult to save and invest. I know so many people who’ve been working for more than 5 years but have no investments till date. The common excuse I hear is “when I get a promotion Iwill start investing, maybe next year”. But the fact is you do not need a bigger income to invest. Even if you make 15000 Rupees per month, you can invest 500 Rupees. It’s not about the sum of money you invest, but consistency and the power of compounding.
- Your impulsive purchase habits reduce. I say reduce and not eliminate because being impulsive is part of the human nature. Even after budgeting for 8 years straight, I have made quite a few impulse purchases which has caused a dent in my budget at times. But the fact is that because I budgeted, I had to make no cuts to my savings and investments, and I could adjust my impulse elsewhere.
- For example, there was a month when I bought an expensive handbag as an impulse purchase. I did not budget for it, and I did not want to take this amount out of my saving. I re-evaluated my budget for the month, and I totally cut-off my entertainment, eating out and salon budget for that month. These were all discretionary expenses, and I could go a month without these. Although would not love it. It made up for my bag and taught me a good lesson too. If you need something, either budget for it or be ready to let go of a lot of other things.
- You are aware of lifestyle creep. As we make more income, we tend to upgrade our lifestyle accordingly, bigger house, bigger car, a new phone and so on. Such that the additional income that you just started making got adjusted into your lifestyle upgrade. What is the point of making additional income if you are not able to invest a portion of it. This is not to be extreme frugal, but saving and investing is important, because we cannot be working every day till we die. There will come a point in our lives where we’ll need the money to work FOR US. And if we do not save for that corpus now, we will never have that pool.
How to Create your first Monthly Budget
Now coming to the part how to create a monthly budget. I believe in zero-based budgeting. What it simply means is that every rupee of yours is accounted for. You assign a purpose to each rupee you make. The first thing to get started with budgeting is deciding on the categories for budgeting. Now this would differ from person to person or from family to family. But I use 3 broad categories to cover my life – needs, wants & savings
Each of the broad categories should be further divided into subcategories:
NEEDS:
This category includes all the basic survival necessities. All the fixed and discretionary bills that you have recurring each month. In simple words, this category runs your existing life. It should comprise 50% of your total income.
The monthly subcategories can be:
• Rent
• Maintenance Fee
• Water bill
• Electricity bill
• Phone bill
• Grocery
• Cleaning bill
• Sinking fund
• Petrol
Note that this does not include any “fun” categories like eating out, shopping, OTT subscriptions etc. Think of it this way, these would include those categories which are non-negotiable. No matter what, you would have to pay those bills month on month.
Let’s say you lose your job tomorrow; you would still need food to survive right? Then “grocery” would come under “Needs”. But you can cancel your OTT subscriptions or shopping until you get a new job, so these would not come under needs. These would come under the next category of “wants”.
WANTS:
Life would be extremely boring if we were to survive just on needs. Because there is no fun just paying the bills, right? We need the dopamine hit of shopping, eating out, going to the movies etc. These are fun stuff that we want to splurge on, not because they are a necessity but because they give us happiness and joy. And that is exactly why we should budget for it.
The wants part of your budget should take up 30% of your total income.
The categories under want can be entirely different from a person to person depending on their lifestyle, but few example can be:
• Shopping
• Eating out
• Movies
• OTT subscriptions
• Gym membership
• Expensive skincare
• Hobby and craft supplies
• Holiday celebration
• Travel
To put it in simple words, this would include any expenditure that are fun for you, and you indulge in them month on month. But if you were to lose your job and have no income for a period, you could survive without these very well. It would not impact your survival.
SAVINGS:
Now this is the category which takes care of your future and comprises of 20% of your total pay check. This is the money that you need to be putting aside each month as soon as you get your pay check. This is the money that you’ll put to grow so that it supports you later in life.
There are subcategories here too:
• Emergency Fund
• Investments in mutual funds
• Investments in stocks
• Public provident fund
• Sovereign gold bonds
• Digital gold
• National Savings Certificate
Now the above category may differ highly based on your risk appetite. But it is important to save and invest every month in some or the other instrument.
Once you decide on your categories under Needs (50%), Wants (30%) and Savings (20%), allocate the amount you would spend each month on each of the subcategory. The spend under each category is going to be either fixed or variable. In case of variables, allocate the estimated amount.
Once you are done with the budget allocation, next comes the budget tracking.
How to track your spending
It is going to take some iterations of the budget to get into a solid and robust system of spend allocation, but the key here is to not give up and keep tracking no matter where you’ve overspent or spent outside of your budget.
There is no point of creating a budget if you are not going to track your spending and make some use out of your budget to improve your financial health. So, it is important to note down each time money goes out of your account.
Reviewing the spend for at least 3 months can give you a picture of where your money is going each month and if you’ve missed out any recurring categories in your budget.
I have my budget tracker created on an excel workbook in my laptop. And I use a simple and free app on my phone to track my outgoing expenses. As soon as I pay anywhere, I go into the app, put down the amount and the category and save the input. At the end of the day, I get into my tracker and update the values from my app to the excel values.
I know it looks like a lot of work, but it isn’t. There are many apps in the market these days where your bank account could be integrated into the app itself and as soon as you make a digital purchase the amount would directly reflect on the app and categorize itself based on the type of expense. So, you could try one of such apps as well, but such apps need to be purchased.
I started tracking my expenses way before digital payments had started. And in those days, I did not want to be paying for an app to track my spending. It sounded ironic to me. I wanted a simple and accessible system which had no dependency on money, and so I use this app called “Spending” from the app store. It’s simple, reliable and the free version serves my needs just fine. The only thing I am required to do is get into my excel workbook every now and then and input the numbers manually into it.
However, I prefer this step because it makes me manually investigate my budget every time. If the app was doing all the tracking for me in the backend, I would get lazy to even look at it and would never assess my budget to make changes. Since I manually do this assessment, it gives me a glimpse into where I am overspending, and it helps me tweak my budget accordingly.
Investigate your Budget
So now you’ve created your monthly budget and allocated spends to each of your categories. Let’s say you call this your “Projected Spend”. Next, you’ve also tracked your spending and updated the final spend against each of your category. Let’s call this the “Actual Spend”. The difference between the “Actual Spend” and the “Projected Spend” for each category is where you have room for improvement.
And your goal must be to make sure the difference is negligible each month. So accordingly, you’ll need to tweak your budget and your monthly spendings.
Also as advised you are to start with a 50/30/20 split for Needs/Wants/Savings. But this need not be fixed. If your goal is to plan heavily for retirement you can maybe work out a 30/20/50 split for Needs/Wants/Savings.
My financial goal each month has been to improve my budget split. I am now at 38/23/39 split for Needs/Wants/Savings. And would like to take my saving to a 50% soon.
Final Words
You need to remember that monthly budget is a tool and is not a one-time solution to a problem. You need to use it regularly and take away learnings and insights from your budget each month. You will learn a lot more about your priorities once you see where your money is going each month. Does it align with your vision? Does it align with your values for life? These insights will not only help you better your financial health but your overall well-being and what could be better than that.