In pretty simple terms, budgeting is a process of estimating your income and expenses for a particular period. In broader sense though, it includes besides planning, analysing, reviewing limits of various expenses and also eliminating unnecessary ones, thereby maximizing the savings portion of your income and effectively contributing to your Financial Planning(FP).
It helps you track your monthly(and ultimately yearly) expenses so that you can determine the areas which need improved spending and also the areas where you can cut off the spending a little to accommodate other things. By budgeting, you ensure that your hard earned money is spent in best possible ways. It is to help you change your spending habits too.
Spendings have this nasty habit of going out of control during festive seasons, especially with credit cards. We spend and spend, knowing we don’t have to pay it back right away. We buy things which may or may not suit our pockets. Sometimes, unplanned bill payments can disturb your planned activities for the entire month. The reason for this is also the reason why you should start budgeting. When unplanned, your spendings will be like they dont matter for a little overhead. Didn’t get it?. Say you want to buy a pair of shoes. You went with a rough idea of wanting to spend as much as 1000 rupees. Now, the pair of shoes you actually liked, costs 1200 ruppes. Should you buy it or try to find a bit cheaper version? your inner self may not hesitate for that extra amount and you end up buying them. It happens many a times, doesn’t it? Such spendings will ultimately cause you to have spent more than you actually estimated initially. When you carefully plan for all these by planning your budget, you pay a little extra attention to the spending. Figures that you have set in your planning always stay in your mind which restricts you from spending that extra amount. Because now your mind calculates that if you spend extra 200 rupees for your shoes then there are some more important things in your planning which will get cut in their spending amount which, in turn, may not be possible, if such items are something like credit card bills, electricity bills, gas bills etc…
Before we go into more details on budgeting, there is this phenomenon called cash transactions which is worth pondering over. India, still largely being a cash-driven economy, there are lots of cash transactions happening everyday. Wheher we buy a petty thing or a pricey thing, we like to pay in cash. We love to show the power of cash in our pocket. It may seem cool on the face of it, but for the convenience’s sake regarding budgeting, it’s not a good idea. Spending in cash makes it difficult for you to remember the transactions after a while unless you record them properly somewhere. So, it’s better to route your spendings and payments through a bank account or a credit card, because that will help you record transactions easily.
Okey, taking it further, budgeting doesn’t require a special accounting knowledge or like that. Anybody who wants to do it, can do it. Infact, there are many Apps (budgeting tools) available on platforms like Android, Windows Mobile and iOS. In most of them you record transactions by inputting transaction details such as date, amount, spending category, short description etc. After a while you can start generating reports and pie charts that will show you how your spendings are going. You can view your money flow by category, by months or by a particular period. You can then analyse how much do you spend for a particular item, say grocery during the month. There will be items which will make you start thinking that you can spend a little less for them. So you would like to put limits on such items. This itself is called budgeting. You put estimated figures for each category, thereby providing that much amount to spend for them. As I said before, if you stick to your budget figures, ultimately it will increase your savings and make your spendings wise and responsible.
There are even apps which connect to you credit cards and bank accounts so that if any transaction happens through those accounts, it gets recorded automatically in such apps. Peace of mind, isn’t it?. You still have to manually enter the details of cash transactions though. That’s why the lesser number of cash transactions means more convenience. But there may be people like me who are sceptical about letting third party apps access my bank account details. If it’s so, you can use simpler apps. You can also use spreadsheets like Excel if you are familiar with it. Theoretically, you can even use pen and paper (traditional diary writing?) for this, if you have got enough time and patience.
But all these require you to make sure that each and every transaction gets noted, even if it feels (and it will) tidious and boring at sometimes. Whether it’s a cash transaction, a money transfer, an investment, a utility bill payment or your income, you have to record every such transaction in order for a budgeting tool to be able to provide you a true picture of your finances.
So, start budgeting and start improving. Besides, this is the auspicious day of “Dhanteras”. And I would say, what better day than this to start being responsible and smart about your finances.
Will be back soon…