Importance of a budget and why you need one to succeed financially

Have you heard the story of a blind man in a dark room, searching for a black hat. And the best part of the story is, the hat is not in the room he is searching in. That is how your finances will be if you do not have a budget. You will have no clue what goes on, how much is needed and how far to go before you get there.

What is a budget and what is it not

Let me first say what budget is not about. Budgeting is not about starvation. It is not about cutting your expenses or about letting go of luxuries.

A budget is about accountability. Setting up a budget is all about tracking what goes on in your life financially and how you are accountable for it.

Simply put, a budget is a plan that shows how your finances are going to look like in a future period. It can be for the next week, month or even a year. Governments and companies have them. So should you.

Benefits of having a budget

  • You have a clear idea of what you need and how much you will have in excess or how big a short fall
  • Helps you be prepared and plan better financially
  • Easy to forecast your income and expenses
  • Helps in reflecting and seeing how you did later on against what you planned
  • Helps provide greater accountability to you and your money
  • Helps curb impulse spending and binge shopping
  • Makes it easy to set financial goals and track progress towards it

Can you add a few more benefits?

What a good personal budget should be like

Simple and elegant

Don’t over complicate it. You most certainly do not have to make an entry about every single thing that goes on in your life. No need to mention that 20 bucks you gave your grandma!

A complicate tracker will make it tedious to maintain. Gradually you lose interest in updating it and it goes to scrap. So instead keep a simple one. Club smaller inputs into one line item and make it easy for you to maintain.

Plan for the unknown

A good budget should help you be prepared for the unknown. On a monthly basis look at setting aside a certain amount towards your emergency funds. The emergency fund can be spread across as cash, Liquid Funds and maybe even a FD that has instant withdrawal options.

Also, by updating the budget regularly, you know when things go out of hand and can jump into action at once. This way you don’t feel like a sitting duck and be confident in your finances.

Fun and shopping should be accounted for

Be realistic when setting up a budget. Include expenses around fun and entertainment. Eating out and shopping should be there too. These are necessities and by putting these under Misc. or All Others category, you will never really get a true picture of your expenses.

Tracked and updated regularly

Your budget is only as good as you regularly update it. You need not update it every day or even per week. Use an app like Walnut or ET Money described below to capture all expenses and try to update and calibrate between planned and actual expenses on a bi-weekly or monthly basis.

Savings and investments

Set aside money in your budget every month for savings and investments. If you have the habit of spending what you want and at the end of the month, putting the left over money into savings, stop it at once. Set a savings goal, break that down and start allocating a portion of your budget to this. Then spend on what is left over.

Fixed Income and variable expenses

You will have a number of fixed expenses and income such as rent, salary to helper, electricity/water/internet/cable bills etc. Account for all of these first. Then budget a realistic amount for variable expenses, such as shopping, groceries, fuel etc. The variable expenses may go up or down, at least you have taken these into consideration and set aside money for them.

FIRE, Financial Independence and budgets

If you are on a journey to achieve Financial Independence, you need to be saving a lot. Most FIRE proponents advise to save about 50% or more of what you earn. At this level, every buck matters. Without a budget, you are pretty much lost and will have no clue as to how much you need to live, how much you can save and what you need to do to improve and increase your savings.

Even if you were to calculate how much money you need to retire, you need a budget. Only then can you somewhat accurately forecast expenses. Once you know this, then you can apply the 4% rule or other methods to decide a retirement goal.

Budget and expense trackers

There are a tonne of expense trackers and budgeting tools out there which don’t require you to pay any money. Zero. All you need to spend is some time setting it up and updating. And the best part is most of them offer auto updating option taking inputs from your text messages. Here are two free tools you can get on Android and Apple phones:

Microsoft Excel is the best for managing budgets

I am sure Bill Gates himself uses Excel to budget and track his billions. While I use the Walnut app to maintain expenses, I continue to use Excel for my actual monthly budget. Just a simple spreadsheet that shows your recurring income and expenses month on month. Include the following

Under income:

  • Salary
  • Rent to be received
  • Interest from Deposits, loans etc
  • Dividends
  • All other income sources

Under expenses

  • Rent
  • Electricity
  • Internet and mobile bills
  • Groceries
  • Entertainment, Eating out, Ordering out
  • Shopping
  • Fuel and transport
  • Medical expenses
  • Maid and other help
  • School fees
  • Credit card bills
  • Savings and investments
  • All other expenses

Walnut App

Walnut app is a great tool to track your expenses. It reads all your messages and automatically files messages showing money transactions (messages from your sweetheart are ignored. I think!). So if you get a message saying salary credited, the app automatically adds this to your income. A message showing you spent Rs.500 at Subway will automatically be added to expenses. The app is smart enough to see it was at Subway and tags it as Food expense.

It is free!

ET Money Exepense tracker

ETMoney Expense tracker works pretty much the same way as the Walnut app. The expense tracking is only an additional feature of the app. It’s actual job is to help with investments and track investments. This one is free as well.

Here is a complete review of ET Money.

Conclusion

The FIRE (Financial Independence and Retire Early) journey is for the disciplined. To be truly successful requires a lot of planning, tracking, reflection and course-corrections.

Likewise, irrespective of whether you are on FIRE movement or not, for your personal finance, it is important you start, if you haven’t already.

I personally have been maintaining a budget from college and update my budget once every two weeks.

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Discover fresh ideas to save and earn more money
Discover fresh ideas to save and earn more money

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Abhi
Abhihttps://littlesaves.com
Abhi is a 29 yr old Indian, on FIRE to retire by 40. He has been investing and learning Finance for the past 12 years. After completing Mechanical engineering, he started working in a multi-national Bank and grew to become an AVP. Currently with an IT MNC as a VP. He lives in Bangalore with his wife and their 1 year old daughter. In his free time, Abhi loves to game on the Xbox, watch movies, read and blog.

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