5 Tips on How to budget money?
Why budgeting money is so important? Why most people not able to do budget money when they get their salary? How we can do budget money efficiently?
Budgeting money is an essential part of a healthy financial life. It allows you to create a spending plan for your money to ensure you always have enough for the things that are truly important for you.
So, let’s first understand why should budget money. Once you understand the ‘WHY’, Then ‘HOW’ will happen itself.
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Most of us feel the money crunch most of the time. We are not able to meet our deadlines on time often. We blame sometimes to less salary, huge expenses, external factors which are out of control from our end…blah…blah…
Six year back, I was also with same problem how to budget money. I have no proper guidance to budget money thoughtfully. But then I started to read books on money management & applied their principles, & with consistent efforts, now fully able to budget money. If I can do it, You can also do it.
The big lesson from reading all types of books was “Take Charge Of Your Life”.
Because we never blame ourselves or never question to ourselves that why we are not able to live a healthy financial life.
Until we ask the question to ourselves, none will come to help us.
So here are 5 important tips which will definitely help you to improve your financial health & budget money.
#1 Take Charge of Your Life:
We should take charge of our lives, no one will come to you to improve our life.
We have to become whole sole responsible for our financial wellbeing.
Once we did this, the next step would be easy. Most of the time people’s decision driving us in all aspect of our life whether its matter of investment…relationship…purchasing…selling…etc.
People blindly follow others, without the second thought that what will work for others, it’s not necessarily will work for them. We have to think independently…We have to make our own decision…We have to believe in our ‘taken’ decision.
Why I am saying to take charge of your life to budget money yourself, because if you want, someone does the best work for you…then do it yourself. As you will do it yourself (DIY) more, more good results you will get. I generally quote a below-mentioned line which is also called magic formula to budget money.
“Which can be measured, can be controlled. Which can be controlled, can be improved, Which can be improved, Will reflect in our lives.”
Here we used four most important words
- Measure
- Control
- Improve
- Reflect
If someone asks us, “What are your monthly expenses?”, most of the time our answer is in approximate figure but not in actual figure because we never measure our all cash inflows & outflows in a holistic view.
We never seen religiously in that part of our life…what is happening there.
So as said ‘measure’ is the first step to budget money.
Let’s understand with an example. If we have to travel, there will be some initial point from where we have to start.
Until we have the starting point, will never able to measure, how much distance covered. It would be just an approximation but not the exact number.
So ‘measure’ will give us the exact number which would be our starting point.
So will start to make a list of all cash inflows & outflows to budget money. This activity will start with ‘from which sources money coming in our pockets’ first.
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#2 Make a list of ‘From Which Sources Money Coming in’:
To budget money, we should start from which sources money coming in our pockets.
We have to make a detailed list of all cash inflows e.g. a person can take into account his monthly salary or if he is doing the business, then can take his monthly average cash inflow from business, dividend received from his investments, any rental income, income from any passive business etc.
We have to take into account every penny to a pound of each cash inflow to budget money.
Once we prepared an exhaustive list of all your cash inflow to budget money, we would be in better condition than earlier, whereas having no idea.
#3 Make a list of ‘Where Money is Going Out’:
To prepare a list of your spending details, start with a list ‘where the money is going out’.
At this point just prepare a list of every paisa which going outside from your pocket.
You should take into consideration every type of expense, even giving to little children, just for the sake of enjoyment.
This exercise will also give us an insight into our spending behaviour. It is very-very important to know spending behaviour. Until we would not be able to our spending behaviour, it’s very little chances to get financial freedom.
When I started this activity, found that online shopping was one of the major chunk where I am spending more on those things which actually not required. Because purchasing products through online shopping is just few click away & material will be at your doorsteps. If you have credit card then it will be more easy to do impulse buying.
So, we have to start measuring our expenses or any cash outflow from our pockets.
Prepare a detailed list of all expenses. When you will prepare a detailed list of all expenses from a penny to pound, you will feel the difference of ‘before & after’ with this activity, because now we have taken charge to budget money efficiently.
To budget money efficiently is very-very important else there are chances one might be affected by financial cancer.
I usually quote the term “Financial Cancer” because most of us never know throughout the life that they plagued with financial cancer until they do this activity.
Here you need a lot of courage to see the financial cancer, if you have & take charge to rectify it, no matter how much it would be painful.
As human cancer, if detected in early stage then it can be cured easily but if it reached to the last stage then it’s very difficult to recover from it. Same true in our financial wellbeing.
If we will identify financial cancer in the early stage of our financial freedom journey, then it can be cured else would suffer from huge irreversible financial losses.
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#4 Identify ‘Fixed vs Variable’ Expenses:
We have now an exhaustive list of all expenses, which was prepared in step #3.
So, the next step is to identify the ‘fixed vs variable’ cash outflows. If we did this activity very efficiently then we will get our answer on how to budget money.
Now let’s understand what is fixed and variable cash outflow. It can be understood with linear equation also.
Y = mX + C
‘Y’ is our total cash outflow
‘X’ is a variable cash outflow
‘m’ is Consumption
‘C’ is Fixed Cash Outflow
The fixed expenses ‘C’ are those expenses which are independent of our consumption, means whether we use or not use it any resource but still have to pay charges as their payment frequency e.g. our dish tv recharge, insurance, school fees, loan emi etc.
Whether we watch our tv or not, but we have to pay charges as per schedule.
Let’s take another example like insurance of car or motorcycle. It has to renew every year. We can’t say like I have not used this car from a year, so I’ll not pay the renewal fee of insurance. This is the ‘C’ of our linear equation.
Now let’s consider the variable cash outflows ‘X’.
These are those cash outflows which are dependent on our consumption ‘m’.
As much we will consume it, as much we have to pay for it e.g. Electricity Bill, as much we will consume the electricity, as much we have to pay for it, Fuel cost is another example of variable expense, as much we will drive our cars, as much have to pay for fuel cost.
So, we have to separate the fixed and variable cash flows, for this we can take the help of our friends who have much understanding about these matters.
Although both fixed & variable cash outflow in our hands but still variable cash outflow gives us more leverage to control it, instead of fixed cash outflows.
Frankly speaking, budgeting money is a boring activity, that’s why most people not to do this activity, hence their lives also not improved. But once you have done this, then no one can stop you from achieving financial freedom.
Always do this activity just one or two days after getting your salary…not after a week.
This same activity I have done six-year back and seen its magic, that’s why I am sharing today.
Our financial wellbeing will not improve overnight rather its continual thoughtful efforts. Although It’s a slow process, I guarantee you would feel the difference in your financial wellbeing, it will improve day-by-day.
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#5 Small Action makes Big Difference:
There is great psychology behind the budgeting money. We all wait for our paycheck date, as salary credited in our account, we become very happy & with this happiness, spend money. But later, found with owes which still to be paid & sadly have no money for it.
With this activity, all expenses known beforehand, how much money would be left in our hands after paying all owes. Now we would be in better condition to make a rational decision & use wisely, whatever is leftover.
So, till now we have prepared a detail list of all cash inflows & cash outflows to budget money.
We can prepare all these stuff on paper or MS-Excel sheet.
It would be handy if we can prepare this on MS-Excel. Either we are making these cashflows on paper or MS-Excel sheet, we should make a graph, which is suitable to understand easily. Because pictures can easily be understood than words.
We can see the progress of our small-small actions month-wise on this graph.
Now spread all cash flow over the year, month-wise.
See the ‘Net Cash Flow = Cash Inflow – Cash Outflow’
Some people would have net cash flow ‘positive’ & some ‘negative’
The ‘negative’ sign of net cash flow of income is very dangerous for our financial wellbeing & if we didn’t budget money efficiently then definitely will suffer from financial cancer.
The first sign of financial cancer is continual negative net cash flow throughout the years, If a person has negative net cashflow then he starts to lend money from their friends initially & then financial institutions to meet his needs. Hence slowly trapped in the cobweb of debt.
We must start first to control variable expenses because we have direct control over it.
Calculate each saving on cash outflow in percentage form e.g. if we could be able to save even Rs.2 on the item of Rs.10, it’s directly 20% saving, which is huge saving but if we will take it in rupees form, then it’s just Rs.2 which is not much amount.
Start to optimize the discretionary expenses, which are essential but not mandatory e.g. dining out with family is essential but not mandatory.
Each penny saved; penny earned. We must figure out all expenses which can be reduced or eliminated as per own requirement.
Now there is a turn of fixed expenses to budget money. As much we would be able to save money from fixed expenses, it would be better.
Whereas to control variable expenses is a routine activity, to control fixed expenses is an occasional activity.
Once we did this, then it might be we have no need to look after even a year, e.g. if a person living in the high rental house and giving the fixed amount each month as rent then he can shift to the less rental house.
As a rule of thumb, your rent should not more than 10% of your in-hand salary. When it would go beyond the 10% threshold value, shift to the less rental house.
Let’s take another example of dish tv, most of the channels we will never see, but still paying for it. So, we should do a one-time activity to plug these types of leakages.
Identify all types of leakages & plug it, you will see the difference.
We must have to remain consistent to control the cash outflow leakages, it should not like that in one month we did very well & in 2nd month, didn’t look after this.
Say ‘BIG NO’ to personal loans, overdraft loans, purchasing by credit card, try to accommodate all expenses within your means.
It may be you would feel pain initially but would comfortable after a few months.
Over the period, with a lot of small action, your net cash flow would become positive.
There is no magic wand, which will turn everything right overnight instead of its consistent, thoughtful actions which will create a fortune.
When you will measure…control…improve all your cash flow, now it will reflect in your life. Now you can enjoy more & your neighbours will feel the difference.
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Conclusion: To budgeting money is a very basic activity to activity to achieve financial freedom. When we will apply the formula of ‘Measure’, ‘Control’, ‘Improve’, Reflect thoughtfully throughout our life journey, we will see the impeccable result in our life. Dare to see your financial cancer & plan to come out of this.