What is a budget?
A budget is a plan for every rupee we have. It represents greater financial freedom and an easier life.
How does a budget help us:
• It syncs our spending with our goals: By creating and tracking a budget, we can decide how to spend our money each month based on what’s most important to us.
• It may help us to enhance our repayment strategy: Creating a budget can help us set aside more money to pay off our debt.
• It can also help you reach your financial goals: A budget can help us plan how much to save for our goals at the beginning of the month.
Steps to make a Budget:
First, calculate our monthly income, choose a budget and track our progress.
Next, track and manage our budget with regular checks.
Understanding Budgeting Process:
The first step would be determining our After-Tax Income
Next, we should create a budget that provides for all our needs, some of our wants, and savings for emergencies and the future.
After that, we should track our progress by keeping a budget diary or online budgeting and saving tools.
We can automate our savings as much as possible so that the money we set aside for a specific purpose comes in with minimal effort on our part.
The last step would be to manage our budget with changing income, expenses, and priorities by reviewing it regularly, perhaps every quarter.
5 Budgeting Methods that can help us:
Before deciding on a new or different way of spending money, we should analyze where we are spending money and understand which area needs our most attention. We can do this by collecting all receipts of all the money we’ve spent for a month or two and at the end of the month, organize our bills into categories, including food, gas, entertainment, etc. This will give us a clear view of current expenses as well as adjustments needed and room for savings.
Let’s look at different budgets and what they can help us in:
1. The Zero-Based Budget Method: Keeping Accurate Records of Income and Usage.
2 . Paying Yourself First Method: Prioritizing Savings and Paying Back Loans.
3. The Envelop System: Improving Your Financial Balance.
4. The 50/30/20 Method Budgeting: Giving more weightage to Needs than wants.
5. “No” Budgeting Method: Minimizing debts.
Let’s have a look at these methods in detail,
1. Zero-Based Budgeting Method:
This is the easiest of them all. It is based on the equation, Income – Expenditure = 0.
People who can estimate their monthly income accurately or have a fixed income should use this method. Here, we add up our monthly savings and expenses and equal them to our monthly income. Zero–based budgeting is the most time-consuming because we have to account for all our expenses. For those who have been working on the budget for a while, zero–based budgeting is better because there is no room for error. However, it’s a good idea to keep some extra cash in your bank account as a precaution. Also, have at least some emergency cash on hand in case you run into a big, unexpected bill.
2. Pay-yourself-first budget method:
Another simple budgeting technique that emphasizes debt reduction and savings is the pay-yourself-first budgeting method. Under this method, we give reducing our debts and saving goals first priority while still managing to make ends meet.
Of course, it’s crucial to give your necessary expenditures and expenses top priority. But because you’ve already taken care of what’s most important to you, you don’t need to keep an eye on how you spend your discretionary money.
This budget works well for people who have trouble conserving money each month or don’t want to spend too much time worrying about tracking every expense.
3. Envelope system budget method:
This technique of budgeting is comparable to the zero-based budget, but there is a significant difference: Everything is paid for in cash. In an envelope budgeting approach, you create a monthly spending plan and allocate an envelope to each category of spending. Then, according to your budget, you withdraw the amount of money required to fill each envelope.
If you run out, you can’t spend any more money in that area for the rest of the month unless you take money from other envelopes. However, one should avoid ransacking other envelopes very frequently as it may have an amplification effect and result in running out of money before the close of the month.
However, it is not a profitable budgeting method for someone who is not comfortable having much cash on hand or prefers to use credit or debit cards.
4. 50/30/20 budget method:
The 50/30/20 budgeting method is simple and needs less work than the zero-based and envelope budgeting methods. The goal is to divide your spending into three categories:
- First, set aside up to 50% of your income for necessities.
- Then, set aside 30% of your salary for wants or discretionary spending.
- Lastly, set aside 20% of your income for long-term goals such as savings and debt repayment.
This budgeting strategy is ideal for inexperienced budgeters because it does not necessitate detailed recording of all your expenses. You can stick to this budget as long as you understand what constitutes a want v/s a need and allocate adequate funds to savings and debt.
The biggest disadvantage is that the 50/30/20 guideline may be impossible for people who have a lot of debt or want to save a lot of money because 20% isn’t a lot. However, the good news is that it may be tailored to your specific requirements. For example, You may want to increase the savings and debt payback categories and decrease the optional or necessary expenses categories. In other words, don’t get hung up on the 50/30/20 ratio. Adapt the concept to your requirements.
5. The ‘no’ budget method:
As the name implies, this alternative budgeting strategy is primarily based on not spending money that you don’t have. Rather than making a budget, you can
- Monitor your bank account balance. To keep track of this, use a budgeting tool or your bank’s online banking or mobile app.
- Be aware of when recurring bills arrive in your account. You can accomplish this by keeping a list on hand in a spreadsheet, Microsoft Word document, or on a piece of paper.
- Set aside money for savings and additional debt payments. Use automated transfers from bank accounts to savings whenever possible, and boost your automatic monthly debt payments.
- Spend what’s left over without being overdrawn. Again, keeping an eye on your account balance allows you to make better decisions.
It’s better if you just use a debit card with this budget because it’s linked straight to your checking account and regularly updates your balance.
We may say that although budgeting is a time–consuming exercise, it has its share of benefits.
Ms. Dilpreet Kaur
Department of Commerce & Management
Biyani Girls College