I am the finance advisor for West Gully (aka the husband) and at first, when she said she wanted to run a segment on money, I was excited! She clearly states, over and over again, that she married a finance guy for a reason. I managed to convince her to let me write this piece, because, well, it is about saving money! Oh yeah, one thing you notice about me, I get to the point. It’s the way of the finance world and I mean absolutely no offense!
To start with, I cannot stress how important it is to budget for personal finances. The primary goal of budgeting is to save and the secondary goal is to identify overspending. If you are new to making money, haven’t yet started but preparing to, or if you haven’t had the opportunity to manage your own money so far, keep reading to find out how easy it really can be! After all, I was able to teach Namrata!
The reason to save may differ from person to person. For example it may be for a vacation, may be to buy a piece of jewelry, or to help support your parents, your family, etc. But believe it or not, many times we look at our finances without any goal in mind! Maybe it’s too scary, or confusion, or disheartening when we think of what we want and look at what we actually have! But like with any other planning, if we set goals for our personal financial situation, set markers or milestones to measure our progress (or not), then those pricey goals become achievable. It could be a simple goal of having a specified amount in your bank in two years or enough money to buy something of value or a complex one like having investments worth a specified amount in five years. Regardless of how much you make or how much you have saved up so far, trust me when I say, anyone can achieve financial stability. No matter how young or how old, how skilled, or how much money you are bringing in, you can make the most of your hard earned money. The key is to think of finances in two parts: an immediate goal and an eventual lifestyle. But for both, you need to start with knowing what you have and what you spend. This is the basis of budgeting.
The key to a good budget lies in understanding your expenses. And by expenses, I mean every penny or paise that you spend and that includes your coffee, snack, a dress, or a pair of shoes that you buy. As laborious as this sounds, try to keep a money journal. For one week, one month etc, log in every thing you spend. Once you have the information on your spending, categorize the expenses into buckets such as shopping, food, gas, groceries, rent, etc. Categories help you identify the ‘must spend’ areas and other areas where you can cut back to save. Your categories are based on your lifestyle so include what ever you spend your money on – no two persons will look exactly the same.
Now that you have the details of your spending, you can quickly jot down your expenses into a monthly budget. Here, you need to understand that a budget is a projection of your monthly future spend based on your past expenses. By creating a budget, you are using your past spending habits to say that your future habits will stay the same, so you are allocating a certain percentage of your money to those categories. So be sure to factor any expenses that may occur at different points of time, no matter how irregularly occurring they maybe. The best example would be car maintenance; this expense occurs regularly but may not be monthly, may be every six months?
And finally remember, a budget should show comparison between your expenses to your income! A general rule is that you should save at least 15% of your income (the more the better, of course). In fact you should identify your savings as an expense on budget. Simply put, add a category to your budget titled ‘saving’ and include that 15% here, along with your rent, food, shopping etc. By doing this up front, you can rest assured that you save first before spending. If you are unable to save at least 15% of your income, you should consider your spending habits and cut back on things you can avoid spending. A great example that always comes to my mind is eating out. Did you know that the amount you spend on eating out in a restaurant once can buy you groceries for one full week??
Once you establish this budget, you can start tracking your actual spending. Classify your spending into categories (as discussed above) and compare with your budget for each category. You should now be able to see where you spent less than your budget and where you spent more. An interesting fact – while your total spend may be less than your total budget, there may be categories of expenses where the actual spend exceeds the budget. Beware!!! Often times this may give you the false impression that your spending is under control. This causes two issues: first and foremost, you just spent too much money in a category which you could have saved and second, it may lead you to think you need to increase your budget for that category. Both are detrimental to your eventual goal of creating a financially healthy lifestyle. Also, always budget for the unexpected. Whatever you can, along with your ‘saving’ category, create a ‘unexpected’ category. Even if you don’t use it, it is always there and the money keeps adding up, to your eventual bottom line of how much you have saved, or can be used when a real emergency occurs.
The saying ‘when it rains, it pours’ happens more commonly than you think. It is basically saying, when something happens (good or bad), it will happen in waves. So always expect something to go wrong, and expect that when things go wrong, a lot of things will go wrong! Therefore, my suggestion would be that you track your budgets for each category, and not your bottom line.
So that’s it, this is the snapshot of creating a budget. There is nothing crazy to it other than taking the TIME to do it. It’s not fun and it can be quite depressing, but it’s doable. Financial health is just like your regular health. It’s easy to maintain good health/healthy weight etc so if you already have good habits, kudos and keep going! And just like regular health, you sometimes have to work hard to get it on track.
There are many free tools that help you create budgets and track your spending. Some even link to your bank account and pull the information from your checking account and/or credit card account. Just a word of caution, be careful what you use and with who you share your information with. Do your research and if you are not sure, talk to your family, your trusted friends, a chartered accountant, etc to get professional advice on best tools to use.
Until the next time we meet, happy budgeting. May the “savings” be with you!!!