How to Make a Budget and Why it is Important?

Money management is one of the most important activities of your life. Without its proper management, you will never be able to achieve financial stability and peace of mind.

Speaking about financial stability, it is an outcome of proper financial planning and following it with a disciplined approach.

Therefore, one thing you should get clear in your mind that higher income doesn’t guarantee you financial stability, and earning less doesn’t mean your finances will never take shape.

How to Achieve Financial Stability?

The first step to achieving financial stability is through creating an income-expenditure plan, popularly known as a budget.

A budget provides a roadmap to your financial life which helps to control your emotions you have regarding your finances.

Budgeting allows you to create your spending plan and ensures that you never fall into the pit of a financial crisis. It helps you to achieve more with fewer resources and keep you out of the debt trap.

How to Make a Budget by Yourself?

Making a monthly budget is no rocket science, and you can do it yourself very easily just by following a few steps. 

Assess your income

First, you need to know how much money you have to work with to start the budgeting process. 

Find out how much you are bringing home each month. Apart from salary income, add other income which comes your way in the form of dividend income, interest, cash gifts & rental income. 

Do not take gross income, always take after-tax income to make a more effective budgeting plan. 

Determine your fixed and variable expenses

Fixed expenses are those which stay the same throughout the year. It includes expenses like, rent, health insurance, children’s education expenses, phone & internet bills etc.

Whereas, variable expenses include groceries, entertainment, travel, eating out, utilities etc. Basically, it includes those expenses which you have to incur but vary each month. If you are not sure how much you’ll spend, then you can review the bills for the last two-three months.

Find out your income to expense ratio

Subtract your total expenses (fixed and variable) from your total monthly income. If your expense ratio is above 50% of income, then you are in serious trouble and the risk of getting into a financial crisis. 

You need to review your expenses, cut your spendings to take it down to a comfortable level. 

Set spending goals

Now, you need to set up spending goals and start budgeting your variable expenses. If your expense ratio is more than 50%, cut on spendings to bring it to a comfortable level. For example, cutting back on your entertainment expenses, dining out, taking public transport will help you to reduce your expenses.

Remember to follow the 50/30/20 budget rule to distribute your income. In this rule, 50% of your income should go after fixed and variable expenses, 30% you can spend on non-essentials like dining out, movies, travel etc. And rest 20% should be kept for saving and debt repayment. 

You can also increase the saving rate by reducing spend on non-essentials. Or, you can keep aside 10% of your income for meeting emergencies by reducing your spend on non-essentials.

Keep a close eye on expenses, and do not deviate spending goals for effective money management. 

Monitor your expenses

After making your spending goals you should track and review your expenses every month. Always look for improvement in your budget and customize it as per your needs without changing the fundamentals.

Tracking budget can be done manually and also through mobile applications for personal budgeting like PocketGuard, Mint, Goodbudget etc. 

It helps you achieve automation and categorize your spending accordingly. You can get alerts and also know the status of the current month in real-time. It helps you to analyze your spending in a better way.

Ways to control your expenses

Following are a few tips and tricks through which you can control your expenses:

  • Use a credit card only if you have money to pay it off at due dates, else it only adds to your list of expenses. Switch to debit cards, if you are unable to control your emotions.
  • Avoid temptations or spend on things which gives you instant gratification like dining out, casual shopping which are heavy on your wallet.
  • Before going for shopping, get a shopping list and stick to it to prevent unnecessary spends

Final Words

Budgeting helps you in developing money management skills that give you a rich dividend in the form of a stable financial life and peace of mind.

Not only financial stability, but it also helps to improve the decision-making process, provides the ability to identify a problem before it occurs and plan for the future.