The means to reach financial targets are through budgeting, the only weapon to control spending and improve saving

As we go through life, our aspirations increase and we set ourselves different goals to achieve those dreams. Of the many targets, financial objectives, mostly driven by needs and desires, are the most important ones and goals are set for saving and spending. The means to reach financial targets is through budgeting, which is the weapon to control spending and improve saving. Budgets are generally created on a monthly basis and record both expected incomes and expenses. The aim is not only to control expenses but to make payments more efficient. Budgeting is an effective tool for achieving financial goals as it keeps track of your income and spending patterns by planning the proportion of money that you either spend or save.  Although making a monthly budget may not sound exciting, it is crucial to keep finances in check. Spending less in one area can help save money that can be used in several ways like funding a bigger purchase, saving for an emergency, college education of children or retirement. So collect as much information as possible regarding your spending pattern and create a budget to stay on top of financial goals.

Define your goals: It is beneficial for any household to live on a strict budget, since savers have much less financial worries as compared to spenders. So defining goals is a great way to start the budgeting process. Research shows that psychology plays a crucial role in money matters and there is a greater possibility of achieving financial goals if a budget is created.

Be as elaborate as possible: Gather as much information as possible about all sources of income and expenditure including spending and income, like bank statements, investment details, utility bills or expenditure on entertainment.

Calculate your income: This is a fairly simple thing to do if you have a job and a secure monthly income. If you are self-employed or have any outside sources of income, be sure to record these as well.

Make a list of current spending habits: This is important if you want to develop a realistic budget as you must have a clear idea about where your money is going. You must track your expenses for at least 30 days to get a clear idea of the spending pattern. Some of the ways of tracking spending habits is to capture them into spreadsheets, using an appropriate app or keeping a tab of credit card statements. Apart from some regular expenses, some overheads are irregular like birthdays and vacations. Your calendar and past credit card statements will help you make a list of all expenses that crop up throughout the year. It is a known fact that people who borrow to cover holiday costs take a long time to repay as compared to those who budget throughout the year. Budgeting makes sure that you don’t need to take a loan for vacations.

Fixed and variable expenses: Divide your expenses into regular monthly ones that are fixed in nature like home loan or rent, car installments, fuel, school fees, credit card payments and so on. Some expenses are variable in nature like groceries, eating out, entertainment and gifts.

Identify your long-term financial goals: Identifying long-term goals will help in aligning the budget as it helps in deciding how much you need to set aside. Generally it is known that setting objectives increases motivation and achievement. You should follow the SMART (specific, measurable, attainable, relevant and time-based) strategy to set goals. For example, be specific and have a target of saving Rs 5,00,000 for the down payment of the house instead of just “save for the house.” Also include deadlines: When do you want to buy that house or purchase a new car or retire or send your kids to college? Set a target date by which you’ll need to achieve your goal.

Use a strategy: One of the strategies that could be used is 50-30-20: Allocate 50 per cent of the income towards essentials like rent, food and so on, while 30 per cent should be assigned towards vacations and entertainment and the remaining 20 per cent should go towards savings.

Stay on track: It is highly recommended that you review your budget. Comparing the actual expenses versus the budgeted ones help you identify the gaps, make necessary improvements and stay on track.

So, you have now got a perfect budgeting process but can you get it right without making any mistakes? Generally, people get discouraged if they are not able to stick to their budgets. To save yourself from any frustration, it is important not to have unrealistic expectations and to realize that fixed expenses have a tendency to create havoc with your budget rather the variable ones. Although budgeting is an important aspect of financial planning, it might become overwhelming and quite challenging for people not used to financial discipline. With the steps discussed above everyone should be able to a create a budget and try and stick to it. You will be surprised to know that once you live on a budget, save money for the future and spend guilt-free, you will experience a much happier life.

 (The writer is Associate Professor, Amity University, Noida)