People have varying opinions on budgeting. While some swear by it, others find it too constricting.
I found budgeting useful to break bad habits, to bring discipline and consistency. Once you have followed the budget for 6 months to a year, it will no longer be a task that needs effort. It will become your new “good” habit. Your lifestyle.
In simple language, budgeting is planning how to spend your money. I like that definition also because it does not speak about saving but spending instead. That makes it sound less constricting.
Also, the heart desires a thousand things, every month. Budgeting helps match the desires to ability and help us prioritize how we want to spend the limited amount of money we have.
How to set up a budget
Three very important things about budgeting –
1) It has to be written down somewhere (paper or digital).
2) It has to be done before the start of month
3) It has to involve the partner (spouse or live-in) because both are accountable for sticking with the budget.
So, if you decide to start now, you will budget for month of May. And you will start maintaining a budget diary/excel/sheet etc.
Now I wrote three posts that you may want to read before you start budgeting :
Decluttering helped me understand my Income, expenses and savings
Controlling the chaos is the priority of managing money as I saw it.
Financial Goals tells you what can be your larger life goals that you want to save your money for.
These three are pretty much the prep steps for budgeting.
Now, on budgeting sheet, put down your income(s). Remember to calculate post-tax income or in-hand salary and list it. Simply like:
Income 1: <amount>
Income 2: <amount>
Income 3: <amount>
Now start listing your expenses. In budgeting, your savings also list under your expenses. But I find it useful to list them separately and then total them with expenses under “Total spend”
Kid’s school fees:
Utilities (gas, water):
TOTAL SPEND: Total expenses + Total Savings
This is assuming my current financial goal is only Retirement and Emergency Fund creation.
Also, note I have listed expenses in a particular order, needs first(essentials) and then wants (luxuries).
Once you do this much you may already see some red flags.
Don’t worry. That’s why you are budgeting in the first place. To take control of your situation.
Now comes the part where you decide what to do with this list.
Budgeting Methods and Strategies
For me, budgeting is like dieting. So many diets. What works for you may not work for me. I may find it easier to stick with some other diet, some other way of putting food in my mouth.
Also, just like dieting, if you force yourself into ways that do not resonate with you, you will not be able to continue for long.
Budgeting also has different strategies. You may start with one, shift to another, test and try till you figure out the way that works for you. It may be one specific strategy or a hybrid version that you will figure out for yourself.
Zero budget is basically making your Total Income = Total Spend.
Meaning, when you sit with your list above, every rupee in your income should be allocated to some spend (expense or saving).
If in the list above, Income minus Spend is not equal to zero, that means you either have more income than you spend (positive value) or more total spend than your income (negative value)
Either way, you want to make this difference zero.
For example :
Income – 100000
Spend – 85,000
You can see you will be left with 15,000 at the end of the month. You must allocate this 15,000 to some category – either save more or spend more. But tell yourself at the beginning of the month what you will do with this.
Similarly, if income is 1 lakh and total spend is coming at 1.10 Lakh, you need to reduce some expense somewhere to make the total spend equal to 1 lakh.
By the end of budgeting exercise, you will know exactly where each rupee is going.
You should ideally be left with zero money at end of the month.
And for that reason, some people find Zero budgeting very hardcore.
The 50-30-20 Budget
This must be the most popular and easiest way to budget for beginners. Because it tells you what to do with your income.
According to this strategy you should mark 50% of your income for fixed expenses (needs), 20% for self (savings) and 30% for discretionary spend (wants).
Going back to the list we made, you may have to do some re-adjustments now. For example, if your post tax salary is Rs 1 lakh, you will allocate 50,000 to fixed expenses, 20000 to savings and 30000 to discretionary spend.
This strategy works for beginners and a lot of people prefer it because it tells them exact slotting.
I am not a very big fan of this because it assumes that 20% saving will be enough. It may be for some people but for someone like me who is a late bloomer in saving money, 20% will not be enough.
This one is interesting and is highly recommended for someone who just has no control over impulses and find themselves living paycheck to paycheck every month.
It is also known as “cash only” method. It may sound very old school but read on.
In the cashless times that we live, we keep on swiping debit cards and credit cards and use wallet payments and have no track of how much is spent where. At the end of the month we wonder where all the money went.
Envelope lets you control that. This method entails making envelopes and put the money aside in these envelopes for each category.
Rent and bills are mostly paid online, but you can use it to control discretionary spend.
Envelope 1 – Shopping : Rs 10,000
Envelope 2 – Eating Out : Rs 5000
Envelope 3 – Books/Stationary : Rs 3000
Envelope 4 – Grocery : Rs 7000
Now when the month start, you start spending for each category.
If by week 2, you have exhausted your 5000 for eating out, you don’t step out in Week 3 and 4. Cook some snacks inhouse and prepare some smoothies.
You had budgeted Rs 1250 per weekend, but you ended up spending more for whatever reason – went out to expensive restaurant, ended up paying more than you expected, ordered your lunch for more days than planned – whatever it is. You stick with the envelope.
An empty envelope means no more spending in that category.
I used this for my Swiggy bills. I did not make physical envelope, but here’s what I did. I was spending around 9000 every month on Swiggy. To control this, I allocated 3000 to Swiggy. This money I put in my Paytm wallet that is linked with Swiggy. I don’t use PayTm for anything else. Every time I ordered, I could see how much I was left with.
That’s what envelope method does. It is linked to psychology.
When you see the physical cash limit reducing, you make an effort to survive through it for a full month.
One Number Budget
I use this style and I find it most comfortable.
For this, you go back and sit with your list. Now after fixed expenses, I decide how much I want to save. This figure comes from goal planning. Whatever is left, I spend it guilt-free. Simple.
The discretionary spend becomes flexible now and is not necessarily categorized.
Also, in the list above, I had included Insurance in fixed monthly expense list. Now say you pay yearly for your term and health insurance. Then this spend will come once a year. Say Rs 50,000 in month of March.
So one way is to divide 50,000 in 12 months, that is Rs 4167 and put it aside every month.
Or in March, you will account for full Rs 50,000, and tweak your budget to reduce the savings and get a new fexi- discretionary-spend figure for the month.
Similarly you account for upcoming occasion, travel etc.
Because you get this One number of flexi-spend every month that you can spend guilt-free, it is called One number budget.
How can I stick to it?
Sticking to a budget can be a struggle initially. In theory, it is extremely important to track your expenses. Depending on which strategy you follow, you should track all the categories and sub categories.
May be a reason that makes it difficult to do and why I prefer One number budget.
You will have to find your hacks that make it comfortable for you. Sticking to the budget only means spending as budgeted. You can maintain a diary or an excel sheet or there are a lot of apps that help you track expenses now. Use them if that is a comfortable option for you.
The easiest way to stick to a budget is to only have access to money that you can spend. So when I follow One number budgeting strategy, I allow myself access to only the flexi-spend. Everything else is out of reach and automated.
Here’s how I manage to stick to my budget :
– I have two bank accounts – Salary Account and Spending Account.
– The fixed expense and savings stay in Salary Account and I transfer the flexi-spend to “Spending Account”.
– I don’t use ATM card for Savings account. EVER. It is not linked to any wallet or even Bhim app.
– All my savings are automated from Salary Account and gets deducted within first seven days of a month.
– All my fixed expenses are also paid from Salary Account.
– My One number, that I transfer to my Spending account, is my limit of monthly spend.
– My spending account is linked to all wallets.
– Only PayTm is linked to Swiggy and that’s how I control my Swiggy expenses.
– Last, I use credit card for discretionary spends and REGULARLY pay it off with my Spending account. Makes tracking easier and also earns me some rewards.
Don’t stress it
Budgeting is supposed to help you control stress, not elevate it.
It worked fine for me. It has helped me a great deal in managing my money, improving my habits and stay disciplined. I needed that to be honest.
When you start, you will find your own hacks and rhythm. Give it time and don’t stress it.
It is important to understand that no one is holding a stick on your head. And it does not have to be stressful. It is not like weight loss, where people get to see physically that needle is not moving and comment on your progress (or lack of it) towards weight loss.
It is money. No one will know. You miss it one month, no issues. Do it again. And again.
I got my kick when I saved those 6000 on Swiggy bill. And I did not starve and die too! In fact I ate healthier.
Wait for your kick, it gets easier from thereon.
Also published on Medium.