Ah budgeting. That most painful rite of passage into adulthood. Right up there with tooth extraction and taxes. Who among us hasn’t tried and failed to keep a budget? It is like dieting, only a lot more boring.
The problem with traditional budgeting is that it is both cumbersome, and ineffective.
Here is how it usually goes. We pore over our accounts to make a list of all our expenses (or maybe use an app). We gasp as how much we’ve spent on frivolous things (that red shirt we’ve only worn once). We slash our budget mercilessly, and vow to follow it religiously. And for a week, or maybe two, we’re very conscious of each rupee. But that quickly grows tiring. Moreover, when the temptation to spend arises (that blue bag!), we simply can’t resist the spend.
So, is budgeting futile? Not if you use it right.
The traditional way of budgeting is focused on tracking our money and trying to resist spending. In our view, the right way to use a budget is to plan your saving and spending, rather than ongoing spend tracking. Without knowing how much you can realistically save, it is hard to save well. That’s where a budget really helps. Take 30 minutes to build what Ramit Sethi, the author of “I will teach you to be rich”, calls a “conscious spending plan”. It is simple (albeit a bit time consuming). But grab some coffee, a notebook (or excel), and get your finances in order.
Here is how you do it.
Step 1: Start with listing out your monthly essential expenses. This includes things like rent, utility bills etc.
Step 2: Then, add the non-monthly essentials. This includes things like doctor’s appointments, life insurance premiums etc. Convert these into a monthly figure so you know how much to set aside each month for them. One easy way to do this is calculate how much you need to spend on them per year, and then divide that number by 12.
Step 3: Figure out how much you need to save for the future. As we discuss in detail in another article, you can either set savings goals (e.g., a vacation, retirement etc.), or simply pick a target amount you’re comfortable with.
Step 4: Add the figures from step (1), (2) and (3). Subtract these from your monthly take-home income. This is your fun “spend”. You can spend it on whatever you like!
Bonus step: Make sure the number from Step 4 is practical. List out the “fun spend” you value (e.g. going out, shopping). Now compare that number to the figure you obtained in Step 4. Play around with these numbers until you’re comfortable with your spending and saving.
Now, what you need to do each month, is save the figures in Steps (2) and (3).
As you know from our previous posts, an effective way to do this, is to simply transfer this money each month to a separate account. It is best if you do this right when your salary comes in.
That’s it. You’re done. You can now spend the remaining money “guilt-free”.
We recognize that this is a lot of math to do. At Easyplan, we’re trying to make this planning easier. Sign up for our goal-based saving app at www.easyplan.in.