Inculcate habit of tracking expenses, investments
When we think about investing, we would spend more time outwards i.e. which investment avenue is good, which investment gives better returns, which is more stable or guaranteed, etc., but what’s mostly ignored is how better one could control their finances.
When we think about investing, we would spend more time outwards i.e. which investment avenue is good, which investment gives better returns, which is more stable or guaranteed, etc., but what's mostly ignored is how better one could control their finances. What one needs to have is a better grasp on the expenses, the savings and the overall budget. They say, a small leak can sink a large ship, so beware of those little expenses that could add a wallop. Hence, budgeting forms critical first step in financial planning and/or in an individual's investment journey.
According to dictionary, the verb of budget to allow or provide a particular amount of money in a budget, while the noun puts it as an estimate of income and expenditure for a set period of time. In simple terms it's tracking finances so one could spend optimally, neither too much nor too little. Dave Ramsey said that "A Budget is telling your money where to go instead of wondering where it went".
Budgeting helps individuals to turn disciplined and prudent in the choices they make, while providing guilt-free experience during their spending. Many believe that the path to wealth is by earning more money, but it actually depends upon how we save it. Of course, budgeting is nothing new and we tend to follow it but it's the consistency that puts us in good stead. While we aspire to create long-term wealth or savings, we must have a clear track of our expenses lest we end up clueless of our earnings.
Financial success has always been about our behavior and budget allows us to cut down our instincts to retain a disciplined approach to personal finance. There are multiple ways one could budget from a balanced money formula to zero-based budget to pay yourself budget to 'No-budget' budget. It's less important what approach one picks up than to have one, even if it's designed by you.
The most popular is the balanced money approach 50-30-20 method where 50 per cent of your income goes towards your needs like housing/rent, transportation, groceries, health and utilities, etc. A 30 per cent goes towards your wants like dine-outs, concerts, parties, gadget spending, etc., while the rest of 20 per cent goes towards your financial future like paying a debt or sizing up your reserves, etc. This is a simpler way to approach instead of tracking a number of variables, you bucket the similar ones into one. The problem, however, is tending to overspend in this due to a higher proportion allocated to wants.
Zero-based budget is where you entrust every penny is accounted for. It's the ultimate balance sheet of your finances. Each inflow is matched with each expense ensuring that every rupee is accounted for. This is detailed layout of each variable for each expense or outflow, for instance, in earlier method, we bunched through similar outflows like savings, but here each is described like PPF, NPS, etc. While this shows an accurate track of every rupee, this is also a very time-consuming exercise, esp. for starters. One has to make a record of each transaction or reconcile with multiple outflows to tally.
The 'No-budget' method as the name suggest is to have no budgetary limits to any of the expenses. All that one needs to keep an eye is on the available balance though adherents actually ensure that all their bills/payments are automated and also have such limited transactions and/or have a mental math of these. So, with no bars available, one needn't track the expenses at all. This is fit for those individuals who're completely aware of their spending nature and have clear priorities in place.
The 'pay yourself first' budget is possibly the simplest of all methods where once you allocate for your saving goals, the rest available is for spending. Despite what it appears, the money is routed to all the savings and investment avenues first before the income is used for any other wants. That way you could limit the discretionary spend, while giving taking care of higher priorities which eventually benefit you in the future.
The advent of technology has greatly enhanced the way we could track our expenses and investments. Multiple mobile phone apps like Mint, Moneyview, mTrakr, etc., are available for anyone to get hooked to budgeting. Of course, still the paper/pen model also works or even a simple worksheet in a computer. The idea here is to bring a habit of tracking ones expenses in their lives. That's why it's said that a penny saved is penny earned.
(The author is a co-founder of "Wealocity", a wealth management firm and could be reached at email@example.com)