Balancing Income And Expenses: How To Create A Monthly Budget And Stick To It

Compounding will work if people form a habit to save money and have patience while investing
Compounding will work if people form a habit to save money and have patience while investing

Contrary to what many may perceive, a budget is not just meant for mathematical nerds or analysts. Budget-building is for everybody and is not dependent on factors such as age, work experience, or even the income slab. Building a monthly budget primarily involves a three-step process. Firstly, one must learn how to manage finances and should aim to become self-sufficient at a young age. Secondly, one must learn how to reduce taxes. Thirdly, one must learn how to cut down expenses. To provide a simplified framework for budget building, Gaurang Sanghvi, Digital Head, DSP Mutual Fund, recently addressed a session in Thrive 2021- an event organised by stocks and mutual funds investments platform Groww.

To get started on building a monthly budget, Mr Sanghvi explained that one should not steal from the future for current gratification. This simply means that we must rationalise our spending and think properly before buying anything. Thinking a night before buying anything might lead to delaying the purchase. Our current savings equals our future earnings. Along with this, one must remember that in the long-term, wealth will matter and not status. This means that we must not chase status, but wealth. Status is temporary and wealth is permanent. (Also Read: Insurance, Stocks, Gold: Here Are Some Popular Investing Habits Of Indian Women In 2021 )

One must also inculcate discipline in terms of compounding. Habit and patience equal compounding. People should form a habit to save money, and also have patience while investing. One can take advantage of compounding only with a combination of both traits - habit and patience.

In this regard, people should keep money invested for long-term, and that invested money should be something that one does not want or need or would like to see. Compounding will work if one keeps investing and reinvesting in people, work, cities, through a holistic process.

During the event, Mr Sanghvi said that the first step is to build a budget. A budget is a written record of the money that flows in and flows out of one's household or pocket every month. One must start budgeting as early as possible and not wait until one is financially strong. A budget is nothing more than the activity of balancing income versus expenses.

Budgeting: What is it and how to budget?

Building a budget involves the following steps:

  • -Establish income
  • -Define needs and wants
  • -Define expenses:  both essential and non-essential expenses
  • -Calculate your weekly budget
  • -Set goals
  • -Set up an emergency fund: Save 'x' amount by the end of a month or year

'Needs' include costs for food, housing, medicine, hygiene, utilities, education, while 'wants' involve movies, vacations, malls, restaurants, shopping, parties. Creating a personal budget involves tracking expenses, figuring out the money that one is spending, and noticing what one is spending that is not a necessity? According to Mr Sanghvi, there are two types of expenses - essential and non-essential expenses.

Essential expenses include what one needs to have compulsorily in order to live. Whereas, non-essential expenses involve what one does not need to compulsorily have in order to live. This may include extra online shopping etc, and people must figure out the products brought are actually required or not. Non-essential expenses mostly cover clothing, movies, video games, or other items. In terms of essential expenses, there are two types:

Essential 'Fixed' expenses include mortgage or rent, insurance - auto and home, car payments, taxes, and school loans. The essential 'variable' expenses include car maintenance, gas, food, electricity, heat, phone. For variable essential expenses, one must think about how much and when they are needed. 

How To Save Money?

Mr Sanghvi suggests that we must 'pay ourself first'. This means one must save a part of the income every month and keep that saving for the long run. For this, he suggests people should use automatic transfers, payroll deduction, or employer's schemes in the most rational way possible. So that before one is able to even touch that part for spending, the money should 'disappear' or get saved in a separate fund or savings account.

Golden Rule of 50:30:20

According to most wealth experts and financial planners, the golden rule of personal finance remains to be 50:30:20. This means that out of the total income, one must set aside 50 per cent for 'needs', 30 per cent for 'wants', and 20 per cent for savings. Mr Sanghvi adds that if due to some issues, one is not able to save 20 per cent, then find ways to increase the income or reduce the wants.

Overall, the key to building a monthly budget and sticking to it involves starting with a plan and taking efforts to grow money in a safe, effective manner. One must be careful not to spend the entire monthly income, but to necessarily try to save some portion for investing in recurrent schemes. Gaurang Sanghvi also explained that one must invest in order to beat inflation. Investing takes prominence as inflation is real and is a part of the economic cycle. 'Rent your money to buy wealth, do not rent your time,' he concludes.