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Many of us have seen videos or reels of beautiful tourist destinations on various social media platforms like YouTube, Facebook, Instagram, etc., and then dream about visiting those places. However, due to a lack of funds, we often postpone our plans. Similarly, some people dream of enrolling their children in the best schools or colleges, but again, money becomes a restriction. This also applies if you want to seek treatment in a costly hospital, learn a new skill, or start your own business. In all these situations, the primary requirement is money or finance, and this money can only be raised or saved through financial planning.
Financial planning isn’t simply a magical solution; rather, it’s a systematic approach to managing your finances with the ultimate goal of achieving financial freedom. While effective financial planning encompasses various key areas, such as debt management, strategic savings, and wise investment, the most crucial component is undoubtedly “budgeting“. This element serves as the cornerstone of financial planning and will be the primary focus of this article. Therefore, we will thoroughly explore what budgeting is, how to do it, how to apply it in daily life, and every other detail about it.
What is budgeting?
Budgeting is all about systematically planning how you use your income. It means setting aside money for necessary expenses first, and then saving or investing what’s left to reach your financial goals, whether they’re short-term or long-term on a monthly or quarterly basis.
How to do budgeting step by step
Step 1 : Determine your expenses
You should take one page or use a notepad to write down all your monthly expenses. Also, add your yearly expenses after dividing them on a monthly basis. Don’t worry, you don’t need to share this with anybody. Once you have everything listed, sort all your expenses into three clear categories:
Necessary expenses : These are the must-haves; such as rent, transportation, food, etc.
Unnecessary expenses : These are the ones you must cut; such as habits like gambling, alcohol, etc.
Nice-to-have expenses : These make life better but aren’t essential; such as home décor, regular outings, movies, etc.
All these expenses vary from person to person, and their needs also depend on the circumstances they are living in.
Step 2 : Limit your expenses and determine your goals
After categorizing your expenses, immediately cut out all unnecessary spending.
Next, if you can save at least 30% of your income after covering essential expenditures, you can allocate some of that saving towards “nice-to-have” expenses. However, if you can’t reach that 30% mark, avoid these extras temporarily and focus on increasing your income. You can also boost your savings by choosing less costly options, like moving into a lower-rent home or using public transport.
Finally, after setting money aside for savings, create another list on the same page detailing your long-term and short-term goals along with their expected timelines. Now, let’s take-off for step number 3.
Step 3 : Divide your savings and achieve your dreams
This is the ultimate budgeting step: dividing your savings into three very important parts.
1. Short-Term Goals : First, save for short-term goals like buying a new phone or laptop, gifts for your parents’ upcoming anniversary, or your children’s school fees. Achieving these goals can have a significant positive impact on your life.
2. Long-Term Goals & Investments : Next, allocate a portion for long-term goals or big-ticket items such as a marriage, car, or house. This portion must be invested in various financial instruments like stocks, mutual funds, bonds, or FDs. Your investment choices should align with your risk tolerance and the need for easy liquidity.
3. Skill & Self-Improvement : Lastly, the third part of your savings should be dedicated to skill and self-improvement. This not only increases your income but also guides you toward ultimate financial freedom. You can even use this money to start your own business.
Here, you might be wondering why we haven’t mentioned an emergency fund yet, as you’ve heard from many people. We actually see your emergency fund as your absolute first and most important short-term financial goal. It should ideally cover 3 to 6 months of your salary.
Step 4 : Discipline is the key of successful budgeting
Creating a financial plan and budget doesn’t have to be a daunting task. The real challenge lies in consistently implementing and monitoring it with discipline.
You’ll need to be diligent with your budget’s execution, regularly checking:
- Are you allocating the decided proportion of your income towards your goals each month?
- Are you truly on the path to financial freedom?
Consistency and discipline are fundamental to effective budgeting. There might be times when you’ll need to make sacrifices for your financial freedom dream.
However, don’t worry if you find it difficult to stick to your budget. You can always adjust it according to your needs, because your budget is a tool for your peace and happiness, not for anyone else’s. Just remember to ask yourself, before making any changes: “Is this truly necessary?”
