Notes to Self

Thoughts on psychology, spirituality and soft skill development for personal improvement


Personal Finance Budgeting

"Early to bed and early to rise -- till you get enough money to do otherwise." - Peter's Almanac

personal finance budgeting

Money management or personal finance budgeting should be a very important element of everyone's lifestyle. But unfortunately because of ignorance or laziness many are not serious about it. The key to mastering your finances is simple - become a wise spender, and personal finance budgeting helps you precisely with this. To plan your budget:

  1. First calculate your total monthly income from all sources.
  2. Figure out your major expenses for the month and then categorize them.
  3. At the start of the month estimate and write down the monthly expenses for each item.
  4. Note down your daily expenses in a sheet.
  5. At the end of the month, calculate your total expense for each item.
  6. Now you can easily find out, on which item your expenses are up to your budget or on which it has crossed your initial estimate. This will help you to cut down expenses for each item to keep your finance within your budget.

Remember, the whole idea behind this exercise is to make you a think before you spend - the less you spend, the more you have. Some things to keep in mind about your budgeting:

  1. Be realistic - Budgeting is not a miracle that'll suddenly solve your money problems or suddenly reveal some hidden amount of money. It works by creating awareness about your current financial status (debts, savings, investment, emergency funds etc) and your spending patterns. This awareness gives you a better insight to make informed choices during any financial transaction, giving you more control over your finances and increasing your confidence.

  2. Invest time - Once you start budgeting, you slowly realize the truth of the old adage of 'Time is Money'. Time is the most important element for money management. The more time you are prepared to invest in your money matters, the greater return you can expect from it; e.g. spending at least 10 minutes a day noting down your daily expenses.

  3. Clear bad debts - Try to draw a line between your good debt and your bad debt. A "bad" debt can be too many credit cards or loans with high interest rate. A "good" debt may be a student or business loan or mortgages because these can also be considered as long term investment. It’s always advisable to pay off your existing debts, like outstanding amount in credit cards or any loans which carry a high interest, before setting aside cash for savings. This is very important to remember - bad debts eat into your daily expenditure and savings and can totally disrupt your saving plans. Hence, tackle any bad debts head on.

  4. Place your daily needs above your wants – It's very important that we understand the difference between our wants and our needs. For example, eating is a need, but dining out in an expensive restaurant is a 'want'. If you see that you are spending excessive money on your 'wants', then either cut back on them or think of some alternative which costs less.

  5. Categorize your spending – Try and categorize your spending plans: e.g. broadly - like debt, daily expenses and savings; and more specifically - like household expenses, travel expenses, mortgage and car payments etc. Then keep aside some amount for each category and try to meet the expenses in that category with it.

  6. Create a savings plan – You need two kinds of saving plans - one for long term (like a retirement plan), and another for emergencies (loss of income, major illness, house repairs etc.). To save, obviously you need money in hand. And the easiest way for that is spending less than what you earn. Also note that a saving plan is most effective when you ideally have no debts, or at least no "bad" debt.