5 Simple Steps to Create Your Personal Finance Budget for 2023

To which our sister Ritika replied, "Rohan, you need to first define your financial goals, which helps your decide how much money to set aside and how much to spend. Your second step should be to plan your budget smartly to manage your cashflows. This will help you apportion the required amount for savings and investment purposes."

Rohan replied, "I understood your point, but the difficulty I face is while planning the budget, I do not understand where to start and what needs to be done. Is it necessary to plan a budget?"

To which I responded, "A budget helps you map out your goals and work towards achieving them. If you just save aimlessly, how will you ever save up enough money towards your goals like buying a car or putting a down payment on a house?"

You see, Budgeting is basically a process of creating a plan to spend your money wisely. It helps you balance your expenses with your income, you may not realize but you end up splurging on unnecessary objects, left with zero savings. Tracking the money you spend and planning ahead for future expenses can prevent you from overspending.

Accordingly, let us discuss the framework for money management and how you can create a personal finance budget for 2023 in 5 simple steps:

To create a budget, you need to look at your whole financial picture.

1. Calculate your net income

The first step while constructing a budget is to determine how much money you make each month. When calculating your monthly income, look at consistent sources of income. You should include your paycheck, but should probably exclude less consistent sources of money. If your income varies, like if you working a side job and it brings in additional income, include it. In case it's only irregular income, then don't include it.

The foundation of an effective budget is your net income or salary minus deductions for taxes and employer-provided programs such as retirement plans, health insurance, etc. Focusing on your gross pay instead of your net pay may drive you to overspend because you'll believe you have more money accessible than you actually have. If you are self-employed make a monthly aggregate of your total revenue.

2. Evaluate your expenses

Once you know how much money you have coming in, the next step is to figure out your actual spendings. Tracking and categorising your expenses can help you determine what you spend the most on and where it might be easiest to save.

There are some apps that can help you track spending by linking to your bank account, or you could track it manually by reviewing your bank statements and receipts. Include the cost of housing, utilities, childcare, phone and Internet service, food, student loans, insurance, and transportation, and any other regular bills. As you track your spending, you may find that you spend more or less than you expect on different categories.

Begin by listing fixed expenses - Look at your list of bills and note which ones are regular. Your rent, cell phone bill, loan EMIs, utilities, and car payments will remain the same month-to-month, and these are fixed monthly expenses.

Next, list the variable expenses - These expenses are considered optional or flexible. It includes entertainment, dining out, vacations, hobbies, etc. Don't forget to anticipate costs that aren't monthly but pop up occasionally, like car maintenance, home repair, and holiday spending. This is an area where you might find opportunities to cut back.

Record your daily spending with a pen and paper, an app or smartphone, or budgeting spreadsheets or templates found online. Credit card and bank statements are a good place to start since they often itemise or categorise your monthly expenditures.

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3. Identify your financial priorities

Once you've spent time tracking your spending, you need to analyse your spending history and how it aligns with your financial priorities. If you are not putting in the effort to keep an eye on your spending, it's easy to spend far more than you expect on unnecessary things.

You can feel disappointed when you realize that the brand-new Xbox game, iPhone, or stunning clothing in the store window is out of your budget. But it will make sense when you remind yourself that you're saving money aside for a long-term objective like buying a new house. You need to identify your financial priorities while you create the budget, this will lead to adjusting your spending habits to increase your savings.

4. Design your budget

This is the crucial step where everything comes together, and you need to construct a robust budget. Use the variable and fixed expenses you compiled to get a sense of what you'll spending on in the coming months. Then compare that to your net income and priorities. Consider setting specific and realistic spending limits for each category of expenses.

You may consider to break down your expenses even further, between things you 'need' and things you 'want'. For instance, if you drive to work every day, the fuel counts as a need, whereas a monthly OTT subscription or dining out may count as a want. This difference becomes important when you're looking for ways to redirect money to your financial goals.

One popular rule of thumb for building a budget is the 50/30/20 rule. The rule is a budgeting technique that will divide your net income into 3 categories. It states that you should allocate 50% of your income toward needs, 30% toward wants, and 20% toward savings or paying off debts. How you allocate spending within these categories is up to you.

There aren't any strict rules when it comes to budgeting, though, as long as you spend money satisfactorily and it helps you reach closer to your financial goals. The one truly important guideline is spending less than you earn monthly. Even if you can't put away 20% of your income to savings, trying to save as much as possible is a good financial habit to get into.

However, if the 50/30/20 budgeting rule isn't realistic for you, you can still follow other ways to save and fulfil your financial needs. Start setting aside a small amount of money every month.

5. Review your budget

Once your budget is set, it's crucial to review it and track your spending on a regular basis to be on track. Many individuals consider budgeting as a one-time task and do not consider reviewing it.

However, the cost of groceries may rise, or there might be unexpected medical expenses, you may get a raise, your expenses may change, or you may reach a certain goal and want to plan for a new one. Whatever the reason, get into the habit of reviewing your budget; it can help you stick to your budget plan and help you save enough for investing in worthy avenues that offer significant returns.

To conclude...

It is important to stay on top of your finances. Budgeting helps you make better financial decisions, prepare for emergencies, get out of debt, and stay focused on your long-term financial goals. But, living on a budget is a fundamental component of financial planning, and budgeting is one of the most important financial habits that you should instil in 2023.

This budgeting exercise will give you an estimate of how much amount you have left to make investments towards your envisioned S.M.A.R.T financial goals. Given that, many individuals are willing to invest in mutual funds via SIP as they are capable of generating inflation-beating returns. However, they find it difficult to choose the right schemes and align them towards their financial goals due to a lack of market knowledge and high market volatility driven by dynamic market conditions.

​Warm Regards,
Mitali Dhoke
Research Analyst