For most people, budgeting is as fun as a visit to the dentist.

But this doesn’t have to be the case. Budgeting is important and very useful. Think of it as your own Management Information System (MIS). It should do more than just present the data, it should give you information that you can use to make future resource allocation decisions intelligently.

Here are 5 steps that you should use to build and maintain a useful personal finance budget:

1. Create & Personalize

The first trick to getting it right is to build a budget that fits the way you live your life, instead of trying to live your life to fit your budget. To make this article as practical and useful as possible, let’s get straight into the different Master Categories of expenses that you can include in your budget:
 

Housing (eg: rent, society dues, homeowner’s insurance, house maintenance, white goods, etc)	Utilities (eg: electricity, water, cable, phone, newspapers, gas connection)
Food (eg: groceries. Note - do not include eating out here - it will come under entertainment)	Transport (eg: public transport, vehicle fuel, vehicle maintenance, vehicle insurance)
Loans (eg: home, car, credit card, personal, other)	Clothing and related expenses (eg: personal shopping on necessity basis, shopping for self, spouse, children, clothes, shoes, etc)
Medical / Health Related Expense (eg: standard medication expenses, dentist and doctor fees, hospital fees if any, health insurance premiums etc)	Professional Fees Paid (including CA, Financial Planner, lawyer etc)
Recreation / Entertainment (eg: dining out, movies, any shopping that is not a necessity, holidays, etc)	Birthdays and gifts on festivals (also include one month salary as paid to domestic help on festive occasions, if applicable)
Personal (eg: life insurance, personal mobile bill, toiletries, cosmetics, hair care, subscriptions to magazines)	Other (can include anything that doesn’t fit into any of these categories)

 

If you find that these 12 categories listed here don’t exactly match your life, feel free to chop and change as you require. Remember, your budget is something you are going to use every day, let it be personalized and completely relevant to you.

2. Check

Total up your monthly income and expenses on yourself and family. Ideally, since your budget is a record of your expenses, you should every month be left with what is called an ‘investible surplus’ i.e. your total income, less your total expense. If your expenses are higher than your income, you need to assess which category of expense is taking up a large chunk of your money.

If it is an expense like an EMI, then you have 2 options. Either you can see if it is possible to prepay part of your home loan and therefore reduce your EMI, or restructure your loan to reduce your EMI and extend your tenure. But the latter means you will be paying a lot more by way of interest on your loan. Alternatively, if you can't touch the EMI, you can see where else to cut down your expenses, to give yourself some more breathing room.

3. Improve

The purpose of building and maintaining a budget is not just to record, but to be able to make changes. Each expense category can be represented as a percentage of your total income.
Housing, including rent if any, society dues if any, and house maintenance, can be a big category by itself on a monthly basis, and especially on an annual basis, when you factor in repairs and maintenance or white good expenses if any. This is expected and is the norm.

But if a category such as recreation / entertainment or Personal expenses is taking up a large chunk of your income, you need to reassess your spending habits.
Alternatively, if your electricity bill or other utilities are fluctuating i.e. very high in some months and much lower in others, you can speak to the concerned civil authority to have the meter checked to see if everything is kosher and functioning properly.

It’s always easier to make changes in your variable expenses such as recreation or personal expenses, as opposed to your fixed expenses such as housing or utilities. When you need to reallocate your spending pattern, always try to reduce the variable spend first.

4. Invest

Now we come to the crux of why we built the budget.
You need to achieve certain life goals - educate your kids, buy a house (or another house), buy a new car every few years, build wealth for your retirement, and so on. How a budget can help you is by showing you where your money is currently going. Once you know where it’s going, you will know what to control, or re-allocate.
Your investible surplus can then be intelligently augmented, and your investments can increase. Remember, the more you invest now, the less you will have to worry later.

5. Review

Building and maintaining a budget takes time and effort. But once you get into the habit, you’ll find that it helps you be more organized and make purchases that give you longer lasting satisfaction. At PersonalFN we have encountered clients that spent differently on clothes, eating out, holidays and so on depending on what their personal preferences were. Some families chose to cut down on regular entertainment and recreation so they could plan holidays more regularly. Other families holidayed less frequently, but maintained a larger lifestyle on a more regular basis. Once you know where you’re spending, you can decide what your financial priorities are. This will only be possible if you regularly update and review your budget. This is not a one-time exercise and can have a large impact on your life, so it’s advisable to give it the importance it deserves.

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Comments
kumarasamypalaniappan@gmail.com Aug 25, 2018 Very useful knowledge
goswamiutpal1@gmail.com Dec 13, 2018 The article is essential for entry level people of their life.It is also to some extent required for older people. UtpalGoswami Retired General manager (.SAIL)
shettar_4567@yahoo.co.in Jul 31, 2012 This article is very  good for people who are at 'entry' level of their life-----Amar-shettar M.M. ( retired) Chief Manager, State Bank of  India, Hubli-580 023 (mob) 09448467585 and (mob)09844864226

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