Being on a budget helps unlock the true potential of savings
Budget is an effective tool to learn and actively manage your monthly spending. The size of your plan is only the amount of money you currently hold in your bank accounts, not future estimations. So creating a budget is a great way to track where your money goes each month and an important step to getting your finances in order.
A budget makes the process of achieving your financial milestones, such as building an emergency fund or saving for a down payment on a home, much easier.
While the task may appear complex, it’s not that difficult to create a budget. Besides, once you have a budget or a savings plan in place, the crucial part of the process is done and you can tweak around as your expenditure habits or income change.
A proper budget should comfortably incorporate everything — daily needs, emergency fund, payments and bills, savings, investment, recreation (which I call fun fund), and miscellaneous. Being on a budget helps unlock the true potential of savings and according to me is just the right division of the money for various purposes.
Here are a few tips and tools that help you monitor, follow and tailor a budget that enables you to save money effectively.
1. Track your expenses
As you spend according to your budget, record the expenses throughout the month, preferably on a daily basis. This straightforward budgeting goal is essential to making your money work for you. If you remain unaware of how and where your money is going, it will be difficult to stick to your budget or change problematic habits.
How to find out if you are budgeting correctly?
You’ll know it when you do it. You will 100 per cent be less stressed. Imagine having an evening snack out, without worrying about money. Not holding your breath, every time you check your bank balance. You would be amazed about how much you can improve your financial wellness just by devoting an hour at the beginning of the month to budget. The point isn’t to have more money, it is to be happier with the money you have.
2. Make amends to your heavy spends
Most people can find ways to reduce expenses in smaller spending categories like entertainment or transportation without too much effort. But assuming you have had a working budget for a while, you may have already reined in spending in these categories over time. If you need to make more significant budget cuts, you may have to cut spending in larger spending categories such as housing and travel.
Reducing these costs may require you to get creative — you may need to downsize, move to a lower-cost location, travel low-budget.
3. Indulge in investments
Investments that don’t allow a quick exit might seem like a bad idea. But they are also a great way to remain invested for the long term. Research reports suggest that nearly 70 per cent of the money invested in equity funds is redeemed within two years of investment. So, most investors have not made the stupendous gains earned by mutual funds in the past few years. It is here that the lack of liquidity can prove useful. Allot your money to long-term saving options that discourage early withdrawals.
4. Use peer pressure to your advantage
If you have trouble sticking to the game, try setting up competitions with friends to see who can reach goals the most consistently. A little accountability (read: peer pressure) can help keep you on track too. Get a close buddy to help you keep on track with your budget. This works better if your friend has a similar plan with similar financial goals.
5. Track your progress
Check your finances each month to see if your savings and spending plans are on track. You can go one step ahead and create a well organised excel sheet that tabulates your expenses making it easier for you to check the status of your finances at a glance.
This will also help you gauge what little fixes could bring things back on track? Are your goals realistic? Always keep in mind that most effective budgets are regularly reviewed and evolve over time.
6. Treat yourself to cheat days
Akin to a strict diet, a restrictive spending plan might seem tedious and hard to achieve after a while. To give yourself a break, plan a ‘cheat day’. Set aside a budget and indulge yourself with a shopping spree or expensive meal.
Money management is an art. It is not the amount of money which you earn in a month makes you rich; being rich is just about using your money in an appropriate way. When money is used sensibly, it becomes your best servant and brings along all the comforts of life.