In this time of inflation, it has become a task for housewives as well as working women to run their home smoothly in their limited income. The best way to fight inflation is to make your own home budget judiciously. Making your budget is a key piece of a strong financial foundation. Having a budget helps you manage your money, control your spending, save more money, pay off debt, or stay out of debt. Without an accurate picture of what's coming into and going out of your bank account, you can easily overspend or find yourself relying on credit cards and loans to pay your bills.
A budget will show you how much money you expect to bring in, then compare that to your required expenses – such as rent and insurance – and your discretionary spending, such as entertainment or eating out. Creating a budget is a great way to track where your money goes each month and an important step to getting your finances in order. If you are confused how to create a monthly budget, we have compiled a list of necessary steps in order to give you a fair idea of how to go about it. Read on…
Choosing a budgeting System: There are two basic ways to create, track and monitor a budget.
The notebook and pen: This is the oldest method for budgeting, and it’s also the least expensive option. With this method, you simply write down all your sources of income and all your expenses. If they balance, you’re good to go.
The spreadsheet: The most popular spreadsheet software for budgeting is Microsoft Excel. Many websites offer free samples of Excel budgeting worksheets that consumers can use (like Google spreadsheet), instead of trying to create their own. A spreadsheet lets you organise a lot of information easily and does the math for you.
List your income: Start by figuring out how much you're bringing in each month. Add up all reliable sources of income. Notice that word reliable. If you get cash from outside jobs or hobbies, but not on a regular basis, don't put the money down as income in your budget. Your budget should be a document you can depend on - you have to have a steady income.
If you’re self-employed or have a fluctuating income, use an average monthly income or an estimate of the income you expect to receive in a particular month. Use a worksheet to help get started or even paper and pen.
Create a list of monthly expenses: Write down a list of all the expenses you expect to have during a month. This list could include house rent, fuel, groceries, school fee, utilities, entertainment, eating out etc. Use your bank statements, receipts, and credit card statements from the last three months to identify all your spending.
Determine fixed and variable expenses: Fixed expenses are those mandatory expenses that you pay the same amount every month. Fixed expenses are bills you can’t avoid: rent, utilities, transportation, insurance, food and debt repayment, salaries of domestic staff, school/college fee of your children, and any other essential spending that tends to stay the same from month to month. Variable expenses are the type that will change from month to month, such as: groceries, entertainment, eating out, gifts etc. Variable expenses tend to be more flexible – your gym membership, for instance, or how much you spend on dining out.
Calculate your net income: Your net income is what you have left over after all the bills are paid. You want this to be a positive number so you can put it toward your debt, savings, or other financial goals. Calculate your net income by subtracting your expenses from your monthly income. Write down the number, even if it’s negative.
Adjust your expenses: If your net income is negative, it means you've budgeted to spend more than your income. In other words, if you notice that your expenses are higher than your income, you’ll need to make some adjustments. Otherwise, you may end up having to use your credit cards, borrow money, or overdraft your account to make it through the month.
Variable expenses are typically the easiest places you can adjust spending, e.g., eating out, hobbies, and entertainment. Even some of your fixed expenses can be adjusted, e.g., by reducing your cable or phone bill, cancelling your gym membership, or not taking a vacation this year.
Track your spending: Throughout the month, track your actual spending against what you budgeted. If you go over budget, doing this will help you figure out where you spent more money. In the future, you can take greater care not to overspend in that area. Or you may need to adjust your budget to compensate for the additional spending. If you increase your budget in one area, decrease it in another area to keep your budget balanced.
Make minimum use of credit cards: Paying from your credit card looks cool and convenient; however, they do not suit spendthrifts who often end up in debts. Pay with a credit card only if you will have the money to pay it off at the end of the month. Otherwise, you will owe interest on top of the price of whatever you bought.
The key to a successful budget: Knowing the difference between wants and needs is a key to a successful budget. Evaluate your spending using a ‘wants vs. needs’ analysis. Reduce or eliminate spending in those ‘want’ areas to make more room for the things you ‘need’ to spend money on. For instance, if you need a car to get to work, you could buy a used Suzuki or a new Toyota Corolla. The price difference is huge, and the Corolla is certain to impress your friends and offer a fine driving experience. The question is what can you afford? If your budget does not allow buying Corolla, it’s better to stick with Suzuki rather than go into debts.
Think about taking a vacation to Thailand versus up north areas. Both can offer satisfying and relaxing places, but the costs are radically different. Also think about impulse buys. Say you go to home store to buy some crockery and leave with a dining table you hadn’t planned to buy. You might need a new table, but it’s a good idea to research before putting your money down.
* Once you have set up a basic budget, customise it according to your financial situation and goals.
* Keep an eye on large expenses that only occur on yearly basis, such as insurance payments or house loan or property tax etc. Keep aside a certain amount every month so that you don’t need to worry later.