In a world that endlessly tempts us with ads for sleek new smartphones, mega sales, exotic holidays, and trendy clothing, it’s so easy to overspend without a budget. Whether you’re worried about your finances because you are starting university, getting married, planning your children’s future, or thinking about retirement, it’s never too late to take control of your finances. The best way to start? A good budget. Here are our five steps to building a budget that makes the most of your money, so that you can make the most of life.
You can’t plan a journey unless you know where you’re starting. So first, make a list of all your expenditures – every bill, movie ticket and restaurant meal. Note how much you’re spending collectively on every last expense each month.
Analyze your expenses and rate them according to priority. Do this to decide whether the things you are spending on are absolutely necessary or whether you could live without them. An easy and effective way to prioritize your purchases is by sorting them into three categories:
These are things you require to live or unavoidable bills. This includes essentials such as food, rent or home loan payments, other loan payments, electricity bills and transportation costs. Don’t forget to also include important yearly payments such as health insurance premiums and internet bills.
Even though you absolutely need to pay for these, see whether you can cut them down where possible. For example, you need to eat, but not at fancy restaurants! Cook at home instead. Use public transport such as the bus, metro or train to work instead of a taxi. Save on electricity by limiting your air-conditioner and geyser usage. It may not be a lot but you’ll see the numbers add up and good spending habits form long term.
These are those things that improve your life, but you don’t absolutely need them. For example, a person whose job involves regular field visits may want to buy a motorcycle to make commuting easier and faster, rather than taking public transport. However, paying an EMI on a motorcycle could end up costing much more than your monthly conveyance allowance. Therefore, you have to weigh the benefits carefully before going ahead.
These refer to those things that you enjoy, but could easily do without. For example, a brand new smartphone that you are after for its top-of-the-line camera or an expensive handbag that you’d like because it’s trendy. And it’s not just big purchases, this applies to small (and regular) expenses such as ordering food, getting takeaway coffee and paying for television streaming or magazine subscriptions. The best way to curb spending on your Likes is to remind yourself of your future goals – buying a home, being debt-free, having savings of a certain amount – and how forgoing these expenses can contribute significantly towards them.
Lastly, be honest with yourself—is that thing really a Need, or is it just a Want?
Compare your monthly income with your Needs, Wants and Likes. If it won’t cover everything, decide what to sacrifice from the easiest category first – your Likes. Then, if you have to, move on to the Wants list– this should only be necessary if you’re in debt, want to save a large percentage of your income each month or you have a very long list of wants (check if they actually belong in Likes!). When money worries are a thing of the past, you’ll be glad you did this.
Change your perspective: don’t think of limiting your spending as a punishment but rather as a reward to your future self. If you have debts, decide what you can afford to pay off each month – the more, the better. If you don’t, decide what you want to save each month, and make it easy with regular automatic payments to your savings account. Further, make your money work for you with investments such as mutual funds, public provident funds, gold or sovereign gold bonds and bank fixed deposits. Speak to a financial advisor or trusted, knowledgeable friends and family members for appropriate investment options that suit your lifestyle and comfort level.
When it comes to your Likes, the impulse to buy can be huge – especially if you enjoy the feeling of instant gratification. But instead of focussing on the immediate high of buying something nice, try thinking about these expenses that will affect you later in life. Keep long-term goals always on your mind. Realize that frivolous spending is keeping you from reaching those goals. Then ask yourself whether that new phone or a pair of shoes is more important than being financially comfortable five years down the line?
You shouldn’t have to constantly think about your budget in order to keep track of it. Instead, automate things with the help of an app. Walnut, Money Manager Expense & Budget and Monefy are all great options (which are free to install) with a range of useful features.