“We must consult our means rather than our wishes.”
~ George Washington
Maintaining a budget is a chore. You’ve got to track your expenses, remind yourself of your money promises, say no to buying stuff, and all for what? However, one day, you will realise that it was your budget that steered you away from the debt trap, prepared you for a rainy day, and allowed you to save for every financial dream.
Many of us believe that the wealthy spend without financial restraint. However, rich people plan and save more – they also stick to limits. Financial prudence isn’t a function of your income level – it’s a habit you learn when you value money. Prudence doesn’t mean living in a miserly fashion, it means making well-informed decisions about what you want to spend your money on. It also means always living within your means.
You will eventually be able to consult your wishes if you consistently consult your means. Here are five simple tips to prepare the perfect budget:
Pay yourself first because your financial security is your top financial priority. Decide how much you owe your future self and set that aside as savings. Automate your savings at the start of every month so that you learn to live within a budget. Then review your financial statements to get an idea of how much you actually spend. Identify the gaps so you know whether you must cut back on expenses or not.
Comb through your financial statements and calculate your expenses. Then calculate how much you spend under each category. You could define categories according to the frequency of expenses (monthly subscriptions, annual premiums, one-off payments, ad-hoc expenses, etc.) or the type (fixed, variable, discretionary, etc.) or nature (household, loans, entertainment, etc.).
Once you categorise expenses, you’ll have a clear idea of how much you spend where. Knowing this allows you to assess whether your spending habits are in line with your priorities. If they are not, you could quickly course correct and identify which expenses you want to eliminate or reduce.
Goals keep you motivated. Set a savings target higher than what you have today, challenge yourself to create another income stream, or work on optimizing your expenses. These aren’t easy to achieve and may even take months before you see the results. But having something to work towards, will nudge you to maintain a proper budget.
Leave a Buffer
Sometimes, we get ambitious with our goal setting. Many millennials want to save upwards of 50% of their income. For someone who is free with spending, such a target becomes demotivating. Most of us forget to leave a buffer. When budgets fail consistently, one loses interest. So, whatever your target – leave a buffer of at least 5% to 10%. Over a few months, you can gradually reduce the buffer.
Record & Track Your Expenses
You could try a daily expense tracker like the Kakeibo method, maintain a budget notebook, or manage a monthly expenses spreadsheet. How you want to record and track your expenses depends on what you are comfortable with. There’s no best way to track and record expenses. This is a vital part of the budgeting process. Budgets change over time – just like your income streams, financial priorities, and financial goals do.
With the lockdown in place for at least another ten days, you have enough time to work on your budgets. The first thing you should aim for is building an emergency fund or topping yours up. We are in uncertain times and preparation is key. Your budget could keep you ahead of the curve!